CPA, Partner
View full biography
Impacts of the political environment on cannabis: Current trends, and what may be ahead
Through political and economic swings, this constant so far has remained: Cannabis as an industry is proving to be more than just a passing trend. Amid a global pandemic, supply chain tumult, elevated inflation, and a pervasive demand to legalize marijuana on a federal level, the cannabis industry marches on.
As part of the CannaVest series at last month’s MJBizCon – held just a week after the 2022 midterm elections – representatives from a number of capital providers, operators, and advisors discussed how the current political environment is impacting the industry, with federal legalization still in the works, and talked openly about what businesses can and should expect and envision for the coming years in this still-nascent industry. While much anticipated by many, federal legalization would not be a silver bullet for the industry, or for individual businesses: Careful planning and management now will be key to success later. Read on for a summary of top points that came out of the panel.
- Jeffrey Dunetz, Highgate Capital Partners
- Ankur Rungta, C3 Industries
- Eric Berlin, Dentons
- In conversation with CohnReznick’s Michael Harlow
The political outcome of the 2022 midterms is probably the best the cannabis industry could have hoped for. A Republican-controlled Senate would likely have blocked any cannabis-related legislation. Cannabis reform may have bipartisan support, but there is little agreement about how to move forward and what should be prioritized. It is important to remember that currently, individual state markets regulate cannabis. The midterm results may be more positive for the industry than expected, but it is still difficult to see a path forward for comprehensive reform in the near term. The most optimistic scenario involves passage of some form of SAFE Banking during the lame duck session, which seems unlikely given Senate Republican Leader Mitch McConnell’s success in stripping SAFE Banking from the National Defense Authorization Act.
With legalization could come increased involvement from the FDA and its focus on product regulation. Rescheduling, as opposed to legalization, could lead to a regulatory environment akin to prescription pharmaceuticals and represent the end of the adult-use market as it currently exists in legal states.
States that have invested in developing state markets would then most likely move to protect their local interest. A national marketplace would develop over time as the federal government, the states, and private operators fight to protect their competing interests through litigation and incremental legislative changes. As a result, federal legalization would not immediately create a mature functioning national market.
Federal legalization is expected to prompt additional entrants coming to the market to provide capital. But at the end of the day, cannabis will still be an emerging industry. There is still competition saturation, particularly in unlimited-license states. So, businesses that are marginal operators today shouldn’t count on federal legalization to save them.
As more operators enter the market, more licenses come online, and the price of cannabis drops, existing businesses’ value suffers. Companies have held out for reform at the state and federal level, believing that their enterprise value will increase with each successive advance, only to see values contract as wholesale prices are declining. Those who hold out too long may find themselves very disappointed.
Right now, the depth in the capital markets is limited. Federal legalization would likely not bring a wholesale change in pricing, but it would likely draw more traditional sources of debt and equity into the space over time. The number of providers would increase, thereby gradually lowering the cost of capital. Passage of SAFE Banking or comprehensive reform would not guarantee that traditionally risk-averse institutional lenders would rush into the space.
The cannabis industry is still at the beginning stages, so anyone who doesn’t have a viable business model and is counting on an external catalyst to stabilize their business should rethink that plan. But for a business that can withstand this next period, that is in a place from a capital and cash flow standpoint to make it through to the other side, there is a considerable amount of upside potential in an industry where optimism and sophisticated entrepreneurship prevail. Savvy operators will take advantage of this time to focus on the underlying fundamentals of running a good business, implement performance improvement strategies, and get their financial house in order.
Related services
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.