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In a largely symbolic move, the US House of Representatives passed the Marijuana Opportunity Reinvestment and Expungement (MORE) Act early this month, a bill that would legalize marijuana at the federal level. This was the second consecutive Congress to pass this bill in the House, but it will likely be shut down yet again in the Senate.
In 2020, the Republican-controlled Senate refused to take up the measure based due to low support among conservatives in the chamber. Though the Senate is now effectively split 50-50, but marginally controlled by the more cannabis-friendly Democrats, the bill is still unlikely to be taken up for a vote since Senate Majority Leader Chuck Schumer (D-NY) would prefer to propose his own bill that would impose higher excise taxes for marijuana importers and distributors. Getting a decent number of Republicans to support federal legalization would be hard enough, but even getting Democrats on the same page on exactly how to implement such a program has become its own hurdle.
This kind of legislative discordance is largely at odds with the will of the US general public.
A recent poll of 1,100 Americans aged 21 and older by Pollfish, on behalf of cannabis retailer Jushi Holdings, found nearly two-thirds of respondents believe cannabis has an overall positive impact on society, while 61.5% felt cannabis plays an important role in supporting U.S. economic growth. 62.6% also said “The cannabis industry is important for the local economy.”
MRP has been following a shift in US sentiment toward deregulation of cannabis use for both medical and recreational purposes for several years now. This latest survey compounds 2021 data from Pew Research, which found that 91% of American adults now believe marijuana should be legal for either medical or recreational use.
New Jersey Latest State to Launch Billion-Dollar Cannabis Market
Despite hardline federal laws labeling cannabis a Schedule I substance under the Controlled Substances Act, on par with heroin, ProCon.org notes just 13 states have yet to at least decriminalize the medicinal sale of cannabis. In fact, the 18 states (plus the District of Columbia) that have legalized cannabis for recreational use now outnumber states where the substance is fully prohibited.
State-level actions on the deregulation of marijuana continues to move along steadily.
New Jersey will become the latest state to initiate the sale of recreational cannabis on April 21. Per Barron’s, the New Jersey Cannabis Regulatory Commission will be issuing licenses to seven alternative treatment centers to begin adult-use operations, and at least 13 retail dispensaries. In March, the commission approved 68 conditional cannabis licenses, including 18 for manufacturing businesses and 60 for cultivation facilities. MJBizDaily projects the Garden State is poised to become one of the largest cannabis markets on the east coast, as recreational marijuana sales will ramp up from an expected $775 million in 2022 to more than $2 billion per year by 2025 or 2026. Applying the 6.625% sales tax to those figures would imply annual state tax revenues exceeding $51 million this year and up to $132 million by the middle of the decade. Towns can also levy a 2% local tax on recreational cannabis sales.
As early as June 2020, MRP noted that COVID-19 stimulus expenditures, which continually bled state coffers dry, could be a major driver of cannabis legalization efforts at the state level. States that have legalized marijuana for adult use collectively generated more than $3.7 billion in tax revenue from recreational cannabis sales in 2021, a report from the Marijuana Policy Project (MPP) noted earlier this month. Mariuana Moment notes that was a 34% increase from 2020’s haul, putting the total revenue states have collected on recreational cannabis sales over the last seven years at more than $10 billion.
While state government initiatives are effective in driving sales and ending the criminalization of cannabis, they do very little to help cannabis company’s continual lack of access to financial institutions. Most banks in the US are federally-chartered and therefore have to do their business according to federal laws and regulations – particularly those regarding narcotics. Some state-chartered banks are more open to doing business with cannabis companies, but lack of access to financial infrastructure in the banking system has created a very cash-intensive industry, opening businesses up to a wave of robberies targeting dispensaries and other places that cannabis businesses might be stashing money they cant get into a bank. Those vulnerabilities raise the cost of doing business by forcing firms to hire extra security, pay for greater insurance, etc.
Banking Reform Remains Stuck at Legislative Loggerheads
Forbes notes that 67.6% of those in the aforementioned Pollfish survey said, “Federal banking restrictions should be lifted so that American cannabis companies can have equal access to banking services.” That final question highlights the greatest financial challenge for all cannabis companies is perhaps, from local shops to multi-state operators (MSOs). One popular proposal to address this is the Secure and Fair Enforcement Banking Act (SAFE), which would allow banks to legally handle the proceeds from a state-legal cannabis business by prohibiting certain federal banking regulators from taking adverse actions against banks and credit unions that provide services to “cannabis-related legitimate businesses”. Much like the MORE Act, the SAFE Banking Act has passed the House of Representatives multiple times, only to be stonewalled by the Senate.
Though federal legalization for recreational use, packaged in with criminal justice reform measures to expunge previous marijuana-related convictions, will be a harder sell for Republicans, many conservatives acknowledge the current financial framework for honest cannabis businesses is inherently flawed. US Supreme Court Justice Clarence Thomas, perhaps the most conservative Justice on the bench, denounced the government’s inconsistent approach to marijuana policy last year. In a written statement regarding the court’s decision on Gonzales v. Raich in 2005, Justice Thomas noted his belief that “A prohibition on interstate use or cultivation of marijuana may no longer be necessary or proper to support the federal government’s piecemeal approach… The federal government’s current approach is a half-in, half-out regime that simultaneously tolerates and forbids local use of marijuana.”
When it comes to banking, it’s not necessarily partisan politics holding up reform. MRP has highlighted much broader support among Republicans for new banking laws for cannabis businesses. When SAFE passed the House in April of last year, it carried a significant amount of bipartisan support with a final recorded vote of 321-101. That included 106 Republicans (exactly half of the 212 Republicans in the chamber) voting for approval.
However, Democrat leadership in the Senate is steadfast in their belief that SAFE does not go far enough in addressing “social equity provisions of legalization” and remains focused on once again proposing their own bill that is unlikely to garner much support from the other side of the aisle. With at least 60 votes needed to overcome a filibuster, the Democrats would need every member of their party, the two Independents (who each caucus with the Democrats), and 10 Republicans to support any legislation on Cannabis. Earlier this month, MJBizDaily reached out to 20 Republican Senators, 9 of which are co-sponsors of the SAFE Banking Act, and reported that talks appeared to be “in their infancy, at best”.
For Investors
Despite rising sales and revenues, stocks in the cannabis sector remain in a very powerful downtrend that has gradually eaten away at their valuations since early 2021. Pot stocks ran up powerfully in the aftermath of the 2020 election, following Democrat Joe Biden’s victory and the expectation that his administration would be proactive on deregulating cannabis at the federal level.
For as long as those expectations do not materialize and congress remains inactive on any meaningful marijuana legislation, it seems that shares of the companies in this space will struggle to gain their footing. The AdvisorShares Pure US Cannabis ETF (MSOS), a fund focused specifically on exposure to US cannabis stocks, is down 31% YTD. The ETFMG Alternative Harvest ETF (MJ), containing more broad exposure to cannabis firms based in Canada, has performed marginally better, but is still down 22% YTD. |
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