3 Major Roadblocks for Cannabis Companies
Cannabis legalization is coming.
It’s as simple as that.
And I believe it’s only a matter of weeks or months, not years.
It might not happen in one grand sweeping gesture. But, like any other revolution, change will happen in stages.
Right now, I want you to take a look at this map of the United States.
It depicts the current legal status of cannabis across the U.S.
As you can see, cannabis has been legalized in some capacity in all but three states.
So you may be wondering why I believe the cannabis industry still has a lot of room to grow.
Here’s the thing…
Even though 18 states have legalized adult-use and 36 states have legalized medical use…
Cannabis is still illegal at the federal level.
And that’s created three major roadblocks for cannabis companies, all of which will be completely eliminated if legalization goes into effect.
Roadblock No. 1: Tax Provision 280E
Mention Section 280E of the Internal Revenue Code to any cannabis entrepreneur and they’ll likely give you an earful. It’s easily the most hated tax provision in the business.
This law was introduced in the 1980s when a drug dealer exploited a loophole to deduct business expenses. Section 280E was created to ensure this never happened again.
But it wound up being a real pain in the neck for cannabis companies. Consider…
Normally when companies pay federal income taxes, they start with gross income.
Then they subtract business expenses, like rent, utility fees, employee salaries and advertising costs.
That gives them their taxable income. They pay taxes on this amount.
Simple, right? The thing is… because of 280E, cannabis companies can’t deduct business expenses. They have to pay taxes on gross income.
If you know anything about running a business, then you know that’s a NIGHTMARE.
Cannabis companies wind up paying tax rates of 70% or higher.
One dispensary owner said, “I’m taxed on nearly double the amount my business actually makes!”
Roadblock No. 2: No Institutional Support
According to one market insider, even before the election, “Big institutional investors [were] buying big slugs, quietly.”
Putnam Investments, Wasatch Advisors and Fidelity Investments have all taken large stakes in the industry. And one unnamed institutional investor just made a $100 million investment in Green Thumb Industries.
But the reality is this: As long as cannabis is illegal on the federal level, the big trading houses will stay on the sidelines.
But once that changes… and the floodgates open… the institutions will start buying up pot stocks like there’s no tomorrow.
You see, even if Goldman Sachs wanted to add U.S. pot stocks to its holdings, it couldn’t.
That’s because all domestic pot stocks are essentially BANISHED to the over-the-counter market.
Because of the federal prohibition on cannabis, U.S. pot stocks can’t trade hands on the New York Stock Exchange or the Nasdaq.
If they were to uplist to these more liquid exchanges, the financial institutions would likely deploy some of their combined $404 trillion in assets to acquire shares.
Roadblock No. 3: No Access to Banking Services
Check out this chart.
This shows the total equity capital of commercial banks in the United States.
As you can see, these banks are sitting on about $2 trillion in capital.
And I can guarantee you that not 1% of that capital is tied up in cannabis stocks.
That’s because these banks are federally insured and cannabis remains illegal at the federal level.
And that’s a huge problem for the marijuana industry.
These businesses can’t accept credit cards, acquire loans, set up deposit accounts, write checks or run payroll.
Without these banking services, a lot of cannabis companies are stuck in neutral.
But a simple piece of legislation called the SAFE Banking Act could change all of that.
We’ve covered it here before. It would essentially give federally insured banks permission to conduct business with cannabis companies.
This would free up cannabis companies to hire up… open new locations… acquire smaller businesses and merge with others… and pump money into marketing.
In short, they’d SCALE – and likely make shareholders very happy in the process.
I’ve been closely following the global cannabis market since 2017. So you can bet I’ll be watching the road to legalization every step of the way. And I’ll keep you updated on all the need-to-know information.
Until next time…
Here’s to high returns,
Is the End of Cannabis Prohibition Here?
April 27, 2021
In the Weeds on 4/20: History, Trends, Myths and More
April 20, 2021