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Cannabis Investing

New Federal Cannabis Legalization Bill: Deal or Dud?

The cannabis markets were volatile last week.

And it all had to do with what has been going on in Washington, D.C.

Details of a piece of legislation that’s been worked on for months were kept secret… until days ago.

And when the investors spied what was in it, the market was hit with a maelstrom.

So what the heck is going on?

Decades in the Making

In 1996, California made headlines with the passage of Proposition 215.

This legalized medical marijuana.

It became the first state to do so, sparking a movement.

In 2012, Colorado passed Amendment 64 and Washington passed Initiative 502. This duo became the first states to legalize adult-use.

In less than a decade, 17 other states have followed suit. And now more than three dozen states allow for medical use.

US Cannabis Legalization by State

But it’s really the last several years that have been transformative for American cannabis.

Because even though states have greenlit the use of cannabis, it remains illegal at the federal level. That poses a number of issues for the industry. But now we appear closer than ever to a change at the federal level.

Though, the question is this: Is the most recent headline-making piece of legislation a deal or a dud?

Three’s a Crowd

Despite foot-dragging in Washington, D.C., cannabis legalization has been marching forward in recent years.

The U.S. House of Representatives made history in 2019 when it cleared the Secure and Fair Enforcement (SAFE) Banking Act.

A year later, it did the same with the Marijuana Opportunity Reinvestment and Expungement (MORE) Act.

But neither piece of legislation made it to the Senate floor.

Undeterred, representatives reintroduced both in Congress this year. There was plenty of optimism for passage since the Democrats control both chambers.

The SAFE Banking Act once again cleared the House with a 321-101 vote. And maybe even more importantly, more than half of House Republicans voted in support of the legislation.

The MORE Act is not only a sweeping social justice reform measure but also legislation that decriminalizes cannabis at the federal level. It would essentially do for cannabis what the 2018 Farm Bill did for hemp.

Additionally, it would free cannabis companies from the destructive  Section 280E of the federal tax code. Section 280E prevents marijuana businesses from taking deductions for ordinary business expenses.

The issue is there’s been another bill lurking in the shadows this year. And when the details of it were unveiled, investors weren’t quite sure what to do…

Dud on Arrival

Senate Majority Leader Chuck Schumer, Sen. Cory Booker and Sen. Ron Wyden have been working on their own cannabis legislation.

Back in April, I outlined what investors could expect from the trio

Schumer, Booker and Wyden each introduced a cannabis reform bill in the last legislative session. Schumer had the Marijuana Freedom and Opportunity Act, Booker introduced the Marijuana Justice Act, and Wyden introduced the Marijuana Revenue and Regulation Act.

It’s likely that the bill they’re currently working on together is a combination of the three.

Now, as I’ve stated before, I believe Congress will be making a change at the federal level this year and, at the very least, will alter the scheduling of cannabis in the Controlled Substances Act. That includes descheduling or rescheduling it to a much lower level.

Well, all three of the senators’ previous reform bills were specifically about removing cannabis from this act.

So it’s hard not to imagine their current confidential cannabis bill will look to do the same…

As I expected, the Cannabis Administration and Opportunity Act looks to remove cannabis from the Controlled Substances Act, ending the federal prohibition of marijuana. But it stops short of actually legalizing cannabis.

It would also enact several other elements…

  • It would establish a minimum age of 21 to purchase cannabis products.
  • It would limit retail sales to no more than 10 ounces.
  • It proposes an excise tax on cannabis products, similar to those on alcohol and tobacco. The tax rate would start at 10% the first year and rise to 25% by year five.
  • Cannabis companies with less than $20 million in annual revenue would be eligible for a tax credit to reduce their burden by 50%.
  • It would allow for the expungement of federal records of nonviolent cannabis offenders.
  • It would move cannabis regulation from the Drug Enforcement Administration to the Food and Drug Administration.

So the initial reaction was quite positive. Shares of American multistate operators Cresco Labs (OTC: CRLBF), Curaleaf Holdings (OTC: CURLF), Green Thumb Industries (OTC: GTBIF), Trulieve Cannabis (OTC: TCNNF) and others spiked.

Then they began to tumble lower.

And today, the U.S. Marijuana Index is near its lowest levels of the year.

US Marijuana Index

So what happened?

After all the secrecy and promises, the Cannabis Administration and Opportunity Act doesn’t go far enough. It still leaves the power to legalize cannabis up to individual states.

Beyond that, it’s still in discussion draft form. That means a finalized version – if there ever is one – wouldn’t be introduced until later this year.

Then there’s the issue with the Senate. The bill needs 60 votes to pass, and that would require convincing 10 Republicans to break rank – which, despite the fact that the majority of Americans are in favor of legalization, seems like a long shot at the moment.

But don’t lose hope.

The takeaway remains…

A change at the federal level is coming.

As has been the case since 1996, it may just take a little longer than we initially expected.

Here’s to high returns,

Matthew

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