The announcement by AG Jeff Sessions to rescind the Obama Administration’s guidance on Marijuana business activities (Cole Memorandum) causes a certain near term concern for investment and growth potentials within the Cannabis industry. Although the Federal Government has continued to maintain the prohibitive legal status of marijuana, the pressures brought to bear by the multitude of state statutes that have locally decriminalized and regulated marijuana had heretofore gradually comforted business development within the industry.
While this action by the Attorney General creates a heightened level of ambiguity with respect to the federal government’s tolerance for marijuana businesses to continue operations under state law, we note that nothing has changed as the federal government has always reserved the right to shutdown any cannabis business at anytime. However, in light of the cultural, economic, and political advances in marijuana acceptance and desirability by a majority of Americans, this aggressive attempt by Mr. Sessions to move the country backward may in fact act as a catalyst to accelerate the timeline for federal changes.
A Federal Crackdown on Marijuana – Not Likely: AG Sessions indicates the responsibility of enforcing federal marijuana laws is now at the discretion of each federal prosecutor (92 total) — there has been no indication for a widespread directive to cease and desist state regulated cannabis markets and we expect law enforcement priorities to remain status quo. If federal intervention were to occur, we believe it would be isolated to non compliant businesses. We estimate that California alone will account for ~40% of the U.S. retail market and view it highly unlikely that any of its 4 U.S. Attorneys would take action that would temper the growth of its newly regulated medical and recreational use markets. Also of note is the fact that existing restrictions in the Federal Budget prohibits federal agencies from using funding to prosecute medical marijuana enterprises.
The economic stimulus of a legalized cannabis industry in the U.S. is substantial and the political backlash of a shutdown is too significant. Immediately, politicians on both sides of the aisle reacted in opposition to the Sessions recision and these headwinds may not only stymie the purpose of his initiative but might very well have the unintended consequence of accelerating the timeline for progressive changes in federal laws.
Cannabis Banking – More Uncertainty: With the clear and present risk of operating a cash only business (particularly in CA where we expect retail sales this year of~ $5.2B not including sales and excise tax collections) the bigger issue at hand centers on banking. Current FinCEN guidance requires banks to ensure its cannabis customers are in compliance with a now defunct Cole Memo. Until revised FinCEN guidance is issued, we think banking will remain problematic.
Capital Deployment – Slowdown Likely Near Term: We think the confusion caused by the Sessions’ recision will arguably lead many investors to remain cautiously observant from the sidelines. This may well have an affect upon short term growth within the industry. Accordingly, we expect to see a regression to lower valuations that may eventually create more attractive investment terms, while creating a larger funding burden on businesses. Eventually, however, we expect a return to confidence and growth.