Democrats’ victories in Georgia will pave the way for federal cannabis reform and spur major investors to jump into the booming industry

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    Democrats’ victories in Georgia will pave the way for federal cannabis reform and spur major investors to jump into the booming industry

    Marijuana Cannabis

    Marijuana in Colorado.

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    • Wall Street analysts say Democrats’ of victories in Georgia will boost the prospects for federal marijuana reform as the party will narrowly control Congress, as well as the White House.
    • Analysts from Cowen said the the most likely course is passage of legislation that would protect states that choose to legalize marijuana but stop short of federal legalization.
    • Still, incoming Senate Majority Leader Chuck Schumer has supported legalization in the past.
    • The analysts said that the tailwinds behind federal cannabis reform could spark more institutional investment into the sector. 
    • Subscribe to Insider Cannabis, our weekly cannabis industry newsletter, for more stories like this.

    With a pair of victories in Georgia this week, Democrats are set to control the Senate, House, and White House, giving a major boost to the cannabis industry and prospects for federal cannabis reform.

    Cannabis stocks like Tilray and Aurora posted double-digit gains on Thursday, a sign that the industry and its investors welcomed Democratic control of the Senate.

    It’s not likely the federal government — even under Democratic control — will federally legalize cannabis. The most likely path forward is the STATES Act, a bill that would give federal protection to states that choose to legalize marijuana. The bill would stop short of removing the drug from the Controlled Substances Act, analysts from the investment bank Cowen said in a Wednesday note.

    Read more: A top Wall Street analyst says New York has a ‘very good chance’ of legalizing cannabis and lays out the companies that are poised to profit

    “We believe it will pass though concede it will be a close call as one would need 10 Republican votes and every Democratic vote,” Cowen Washington Research Group’s Jaret Seiberg said. Most bills require 60 votes to pass in the Senate.

    Over two-thirds of Americans support legalizing marijuana, according to a recent Gallup poll, including 79% of 18-29-year-olds and 83% of Democrats. 

    Getting rid of the filibuster, however unlikely, would support marijuana legalization

    However, if Democrats get rid of the filibuster — a rule that allows members of the Senate to debate and delay legislation — then Seiberg says the MORE Act, a far-reaching marijuana decriminalization bill, could come into play.

    The filibuster is unlikely to be removed because Sen. Joe Manchin, a conservative Democrat, has said he would not be the tie-breaking vote to get rid of it.

    “We believe the MORE Act is probably a step too far for this Congress as Washington often prefers to act incrementally,” Seiberg said. 

    Still, incoming Sen. Majority Leader Chuck Schumer has said he’s in favor of cannabis legalization and he’ll have sweeping agenda-setting power.

    But the most likely scenario, analysts say, is not full-scale legalization but rather the relatively limited STATES Act. 

    Cowen analysts caution that the STATES Act alone wouldn’t be enough to ensure that marijuana could be transported across state lines — which is illegal for Schedule I substances. It would open up US capital markets to cannabis companies, reducing the cost of capital for cannabis companies and allowing them to access debt like any other legal business.

    cannabis 01
    Yuqing Liu/Business Insider


    It would also get rid of the 280E rule, a section of the tax code that prohibits cannabis companies from deducting regular business expenses like payroll and office supplies. The rule makes it more expensive for cannabis companies to do business.

    The STATES Act also wouldn’t allow deals like Canopy Growth’s acquisition of Acreage to close, as cannabis would remain a Schedule I substance. In a roundabout way, this could benefit US cannabis companies by protecting them from competition.

    Because of that, Cowen analyst Vivien Azer said she expects the industry to focus its lobbying efforts on the STATES Act. The SAFE Banking Act, a narrower bill that would give banking and insurance protection to cannabis companies, could also still be included in pandemic-related stimulus legislation.

    “That may rob cannabis of the momentum to get to legalization before the 2022 midterm election makes a legalization vote more complicated,” the Cowen analysts said.

    Georgia results could trigger more institutional investment into cannabis

    Still, analysts at the investment bank Jefferies said in a Thursday note that a Democratic-controlled Senate, no matter which path it chooses on cannabis reform, could trigger increased institutional investment into the sector.

    “Any of the MFO, [Marijuana Freedom and Opportunity Act], MORE or STATES Act would likely result in allowing US names to list on a major exchange, clearinghouses would settle trades, investment bank/capital market support would open up, funds would be able to invest without fears of prosecution, and Canadian names could enter US THC,” the analysts wrote.

    As of right now, Canadian cannabis companies like Tilray and Canopy Growth are able to list on marquee US exchanges but have little-to-no exposure to the US market.

    Read more: Here are the top 5 cannabis stocks to buy now to profit from a $6 billion wave of cannabis legalization across the Northeast, according to a top Wall Street analyst

    “The value creation potential in US cannabis is a generational wealth opportunity,” the analysts wrote. They advise investors to look at US ancillary cannabis companies, or those that supply the industry with hardware and software but don’t sell or cultivate THC-containing cannabis directly, or Canadian companies that “have strong US optionality,” like Canopy Growth.

    Still, they say that US cannabis companies will be best positioned to benefit from a legislative change, even though institutions largely aren’t able to invest in them.

    That wall has shown signs of cracking, as hedge fund titans like Leon Cooperman have invested in companies like Green Thumb Industries, albeit with their own personal money.

    In a Wednesday note, analysts from the investment bank Stifel acknowledged that Democrat’s victories in Georgia gave cannabis stocks a strong tailwind, but said that they don’t believe Congress will legalize cannabis.

    “We believe pursuing full legalization would be resource intensive, presenting lawmakers with two-sided risk from constituencies adamantly opposing cannabis reform but more importantly from entrenched constituencies supporting the inefficiencies of what we estimate to be a $17 billion state licensed industry,” the analysts wrote. 

    They added that cannabis would likely take a backseat to more pressing issues like COVID-19 relief, and said that the Democrats’ long-standing concerns “are around social justice issues solved through expungement and decriminalization of personal use,” rather than full-scale legalization.

    The Stifel analysts said they believe “modest reform” is much more likely, like the SAFE Banking Act, which would ultimately give US cannabis companies a near-term boost. 

    Given the federal tailwinds around cannabis reform, analysts at the Canadian investment bank Canaccord Genuity called the Georgia results a “significant derisking event” for the sectory and said they expect a number of states to legalize marijuana, following New Jersey, South Dakota, and other states that legalized last year.

    New York Gov. Andrew Cuomo announced his plan to legalize marijuana in the state on Wednesday. 


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