The cannabis industry has made strides in its effort to transform into a legitimate business sector with a growing number of participants now gearing up to celebrate the plant’s informal holiday, 4/20.
November saw the U.S. industry gain state allies in Maine, Massachusetts, Nevada and, importantly, California, as all four voted to legalize recreational marijuana for adult use. There are now eight U.S. states, plus the District of Columbia, where recreational marijuana is legal, there are 28 states in which medical marijuana is legal and more are exploring some form of legalization or decriminalization.
About 21% of the U.S. population now lives in a state where smoking marijuana is legal and polls say roughly 60% of Americans support marijuana legalization. Canada has gone a step further, introducing legislation to federally legalize marijuana across the country in 2018.
At the same time that Americans turn a corner on the plant that was once the center of antidrug campaigns, investors and state and local governments are realizing its potential as a source of tax revenue. In a report published ahead of the November election, analysts at Cowen and Co. estimated that the cannabis industry is worth about $6 billion in annual sales. Another $25 billion could be added to that from black market sales, and if and when those transition to the legal market, it could be worth $50 billion by 2026, the report found.
Marijuana sales rose 30% in 2016 and Colorado, one of the industry’s earliest U.S. test markets, generated $200 million of tax revenue from $1.3 billion in marijuana sales last year.
But for all of the excitement about the rapid change in the industry of the past few years, there are still many obstacles to overcome and challenges that make investing a risky endeavor.
Here are three issues to consider:
Will they, won’t they
The biggest challenge for the marijuana industry is figuring out how the federal government will approach the industry and whether it will enforce federal laws, which continue to ban use of the plant. Marijuana is still labeled a Schedule I substance along with heroin and LSD, creating complications for growers and sellers in the states where it is legal. For now, the industry seems confident that public approval and expanded research will shield it from government interference, but that doesn’t make critical comments from lawmakers any less disconcerting.
“Even while momentum for legalization continues on the state level and more members of Congress are sponsoring reform legislation, the Trump administration is sending concerning and at times conflicting signals about what its policy will be,” said Tom Angell, chairman of the advocacy group Marijuana Majority, in an email.
During last year’s campaign, now-President Donald Trump was supportive of medical marijuana laws and states’ rights in legalizing and establishing marijuana policies. His Attorney General Jeff Sessions, however, has been a staunch opponent of the plant. Sessions has said “good people don’t smoke marijuana,” and other comments have made it sound as if he is itching for a return to war-on-drugs policies, but he has also recognized there is not much he can do currently to increase enforcement of marijuana laws.
For now, the federal government has its hands tied. The Hinchey-Rohrabacher Amendment prevents the Justice Department from spending federal funds to enforce prohibition laws in states where medical marijuana has been legalized.
Recreational cannabis is a $6 billion industry that is projected to reach $50 billion in legal annual sales by 2026. Here’s what you need to know if you’re thinking of investing in marijuana.
Standards and regulations
Because the cannabis industry has operated as a black market, it’s not surprising that it has taken time for the industry to create standards and for states to come up with a cohesive set of regulations on its use.
However, because they have operated on a standalone basis, those standards vary from state to state, creating a patchwork of rules to be followed. And that can pose a problem when it comes to how marijuana and cannabis products are distributed.
Things like edibles, oils used in vape pens and pre rolls have been gaining in popularity among cannabis users. Packaging for such products has come a long way — measures have been made to make them less appealing to children — but the industry is still figuring out the best dosage for such products.
Edibles and oils tend to have a relatively high dosage of tetrahydrocannabinol (THC), marijuana’s main psychoactive property. While the package might say what the dosage is, some in the industry are worried that consumers are not sufficiently educated and end up taking too much, too quickly because the effects can lag.
In states like Washington, the legally defined dose is 10 milligrams of THC, but some think that is too high and there are companies opting for microdoses as low as 2.5 milligrams.
The lack of industrywide regulations can also be a problem when seeking a dispensary license. In California, for example, the process for determining who is granted a business license to sell marijuana is a hotchpotch of laws and decisions made by local governments, which can differ from city to city.
There is also the issue of banking. Banks are unwilling to take on the legal risk of doing business with an industry that is federally banned. Federal law obliges banks to report any marijuana-related transactions as suspicious activity, and they can open themselves to seizure by the Federal Deposit Insurance Corporation. While some small independent banks have taken the risk, large banking institutions such as J.P. Morgan Chase & Co. JPM, +1.29% have steered clear following a 2014 directive from the U.S. Treasury Department’s Financial Crimes Enforcement Network.
The final barrier for the legalization movement may be cultural — overcoming the stereotype of the pothead as lazy, lethargic and unmotivated. Marijuana clearly has the effect of subduing emotions and can cause sleepiness, but there are also different strains of cannabis with different effects.
Strains are typically broken into three groups: indica, sativa and hybrid. The stoner image of laid-back sedation is associated with indica strains. Sativas have a more invigorating and physically uplifting effect, and hybrids fall somewhere in between.
There are a multitude of cannabinoids that make up cannabis, the most prominent of which are THC and cannabidiol (CBD). While the effects of THC are highly psychoactive, CBDs have little to no psychoactive effects. Some researchers and companies are exploring the effects of individual cannabinoids to better understand them. Denver-based company Ebbu LLC began with the idea that it could produce cannabis products that by extracting certain cannabinoids would give users the same result every time — whether its something to make them laugh, help them stay up late or put them to sleep.
Hollywood’s portrayal of marijuana tends to further the stoner perception of the drug without showing the other side of cannabis.
Conversations with people working in and advocating for the industry typically turn to the issues of social justice and marijuana’s ability to treat certain ailments, notably pain.
While there is still research to be done, cannabis has been recognized as a less dangerous substitute for opioids and other painkillers. Cannabis has been used to treat a variety of illnesses, from seizures in children to traumatic brain diseases in athletes.
The Horizons Medical Marijuana Life Sciences ETF HMMJ, -1.94% has gained 4.1% since its first-day closing level on April 5. The S&P 500 SPX, +0.76% has fallen 0.3% in the same time frame.
By Trey Williams, as published on MarketWatch
Published: Apr 20, 2017