Last month, Senators Cory Booker, D-NJ, Ron Wyden, D-OR, and Chuck Schumer, D-NY, released a joint statement, stating that they are “committed to working together to put forward and advance comprehensive cannabis reform legislation.”
Specifically, their plan is to “release a unified discussion draft on comprehensive reform” in early 2021.
Although President Biden has not publicly endorsed federal cannabis legalization, he has shown support for rescheduling it. In the meantime, Arizona, Montana, New Jersey, and South Dakota voted to legalize cannabis in 2020. That brings the total number of states where recreational adult-use cannabis is legal from 11 to 15. Additionally, the House passed the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, which decriminalizes cannabis. The act is now on the newly democrat-controlled Senate floor.
Change is Coming
“Change is coming,” says Jason Malcolm, Principal of Arcview Market Research and Arcview Consulting. “A recent Gallup poll shows 68% of Americans [favor] legalizing cannabis.” Moreover, as detailed in The State of Legal Cannabis Markets—8th Edition, “more than one-quarter of American adults already consume cannabis.”
In a recent webinar on this topic, Arcview CEO, Kim Kovacs asks, “Are you ready? When speaking to those within the cannabis industry, you cannot ignore the fact that we [in the U.S.] are on a pretty fast track to federal legalization.”
David Abernathy, Principal of Arcview Market Research and Arcview Consulting, adds, “For most cannabis businesses, both plant-touching and ancillary, federal legalization will represent some of the biggest opportunities and most significant threats that they have ever faced.”
As momentum builds toward federal legalization of cannabis, here are the topical questions that people ask the most.
When Can We Expect Federal Legalization?
With democrats controlling both the executive and legislative branch, we are closer to federal cannabis legalization than ever before. However, the coronavirus pandemic and subsequent recession have been the main priorities for the Biden administration thus far. Nevertheless, the much anticipated federal legalization of cannabis could plausibly happen within the next 1-2 years.
“Since November, four new states have legalized medical and/or adult-use cannabis. [That brings] the tally of legal adult-use states to 15 and medical-use states to 36,” emphasizes Malcolm. “President Biden has discussed rescheduling cannabis to Schedule II of the Controlled Substances Act. However, VP Harris favors descheduling cannabis altogether. We are anticipating the latter which introduces fewer complexities going forward and keeps more of the existing industry infrastructure in place.”
The MORE Act is an exciting development in the federal cannabis legalization conversation. This piece of legislation, if passed, would “remove marijuana from the list of scheduled substances under the Controlled Substances Act. [It would also] eliminate criminal penalties for an individual who manufactures, distributes, or possesses marijuana.”
Besides descheduling cannabis, the bill would also:
- Require the Bureau of Labor Statistics to regularly publish demographic data on cannabis business owners and employees
- Establish a trust fund to support programs and services for individuals and businesses in communities impacted by the War on Drugs
- Make Small Business Administration (SBA) loans and services available to entities that are cannabis-related legitimate businesses or service providers
- Prohibit the denial of federal public benefits to a person on the basis of certain cannabis-related conduct or convictions
- Establish a process to expunge convictions and conduct sentencing review hearings related to federal cannabis offenses
Currently, the MORE Act is sitting on the Senate floor where it has been referred to the Committee on Finance. With democrats now in control, the bill shows more promise of getting passed. But experts are cautiously optimistic on its path to becoming law.
Progress at the federal level is slow. But cannabis legalization continues to grow at the state level, which ultimately informs federal policies.
With Federal Cannabis Legalization on the Horizon, How Will it be Implemented?
In October 2019, the National Cannabis Industry Association (NCIA) released a whitepaper. The paper outlines how officials could regulate cannabis at the federal level. In the paper, they split cannabis products into four categories:
1. pharmaceutical drugs
2. ingested, inhaled, or topically applied products with more than de minimis amounts of THC (<0.3% THC)
3. ingested and inhaled products with de minimis amounts of THC
4. topically applied products with de minimis amounts of THC
A different governing body would control each category. Each would have its own set of rules — just like alcohol and tobacco. For example, the NCIA recommends that the Tax and Trade Bureau (TTB), Food and Drug Administration (FDA), and state regulatory authorities control category two — which includes adult-use cannabis.
“The first and most important step of this new regulatory process involves removing marijuana and THC from the Controlled Substances Act (descheduling),” states the NCIA. Once that happens, we can approach implementation at the state level.
The rollout for states could take elements from both alcohol and tobacco regulations, as well as states with successful adult-use cannabis programs. There’s a lot we don’t know; officials are still developing the hemp and CBD regulatory system. There remains a lot of ambiguity in how officials view those products at the federal level.
There could be a major logistics effort around importing and exporting products across state lines. The federal government will likely give states some amount of control over making decisions regarding interstate commerce and trade agreements. To protect local business, some states, especially those with current legal cannabis programs, may block imports from other states.
Long-term reform and implementation will take time — probably many years — to sort out. But fundamentals can be placed shortly after federal legalization, which is a big step in the right direction.
With insight into how a national rollout would look like on the state level, it’s important to understand the financial implications of federal cannabis legalization.
What are the Financial Impacts of Federal Cannabis Legalization?
There’s no doubt that federal legalization will have a huge impact on the existing cannabis market.
“Many companies will fail during the transition. Many others will generate the kind of generational wealth that is only possible during this kind of seismic shift in the economic landscape,” says Abernathy. “Every cannabis company should be looking at the most likely federal legalization and regulatory scenarios and planning how they are going to position themselves to take advantage of the opportunities and mitigate the risks that come along with federal legalization.”
A big component of the financial impacts of federal cannabis legalization is banking. The SAFE Banking Act, would “provide a safe harbor for financial institutions that work with cannabis business clients, effectively opening the door to formal banking relationships in the fragmented, federally illegal cannabis industry,” according to Cannabis Business Times.
Additionally, federal legalization would alleviate the current financial burden regarding Section 280E of the U.S. tax code. Currently, it reads: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I or II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Considering cannabis is a Schedule I substance, tax law doesn’t allow Cannabis Related Businesses (CRBs) to deduct ordinary and necessary business expenses from their net income. That results in a much higher tax rate compared to other businesses.
“Fortunately, the IRS recognizes the cannabis industry as a growing and emerging market, which is a major step in the right direction,” emphasizes Malcolm. “They have taken steps to formalize a FAQ page on payment options and record keeping to support and standardize the industry. This is great news for a sector that is weighed down by the 280E tax code. It also provides a glimmer of hope that the federal government has bigger plans to ease the burden on CRBs.”
Federal legalization will also have major impacts on the stock market. “One thing is certain, the market will change dramatically when the federal government legalizes cannabis,” proclaims Malcolm. “The question becomes, how prepared are the existing CRBs? They should understand the impact that various federal legalization scenarios are likely to have on their model. [Then] determine the next steps required to survive and thrive in a very different market landscape.”
The Federal Legalization Readiness Review
At The Arcview Group, our comprehensive Federal Legalization Readiness Review will help you prepare for the most likely federal legalization scenarios. We do this by digging into your business and identifying the risks and opportunities that are likely to accompany a change in federal policy. Whether plant-touching or ancillary, we will spend time getting to know the ins and outs of your business. We will then provide you with a customized, in-depth federal legalization SWOT analysis to help you think through the opportunities and threats facing your business post legalization.
Arcview Market Research forecast that worldwide legal cannabis industry revenue would grow another 38% to $20.4 billion in 2020. The most recent edition of the widely-cited State of Legal Cannabis Markets forecasts global sales to reach $46.8 billion in 2025. Sales will grow at a 21.2% compound annual growth rate (CAGR) from 2019-2025.
If you’re looking for more data on the cannabis industry, order the full report, The State of Legal Cannabis Markets—8th Edition. It has the latest cannabis industry data to give you a deal-making edge as you navigate the ever-evolving cannabis market.
The Arcview Group has been at the forefront of cannabis investing for over 10 years. It is the first and largest group of high-net-worth investors in the cannabis industry. Forbes called Arcview the “top marijuana investment and research firm.” A network of high-net-worth cannabis investors who have funded more than 300 companies, and funded over $300M for cannabis companies, makes up the firm.
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