Do US Cannabis Operators Really Want Legalization?

No direct roadmap for US legalization at the moment

The US cannabis marketplace can be confusing — although many states have opened the doors to programs that allow the sale of medical or recreational cannabis products, the drug remains federally illegal.

These federal rules are impeding the growth of the industry in several ways. For example, cannabis companies can’t secure banking services, and publicly traded companies don’t have a clear path to US-based investors.

They can’t trade on senior US-based exchanges like the NASDAQ and the NYSE, and instead must offer their shares on Canadian exchanges like the Canadian Securities Exchange and the NEO Exchange. Over-the-counter listings are an option, but they don’t tend to attract the bigger investors MSOs are looking for in the long run.

It’s easy to see what senior exchanges could do for these companies, as their Canadian counterparts with no plant-touching businesses in the US have seen increased trading volume and more attention from generalist investors.

Aside from those problems, as MSOs have become bigger and bigger, current federal policy has hindered these players when it comes to other important financial issues such as tax filing.

Given these overall market conditions, it would be easy to think MSOs are desperate to see meaningful changes by way of wide-ranging US cannabis legalization.

However, even in the face of all these challenges and disruptions from a lack of federal regulation changes, is it fair to ask about what MSOs have gained from operating during this unique moment in time?

Legalization would change level of competition in the US

Current US market conditions make it so the type of competition MSOs face is limited at the moment.

“I don't think there is anybody looking forward to Canadian operators coming in and trying to gobble up market share,” Matt Carr, chief trends strategist at the Oxford Club, told INN. “The MSOs are probably pretty okay with these international players being kept out of the loop at the moment."

But it’s not just the Canadians vying for an entryway into the US.

Several financial and business experts expect to see acquisitions from Fortune 500-size companies balloon in a world in which there are no federal sanctions for cannabis operations in the US. “They're building a moat around themselves, without competition from tobacco, alcohol or the consumer product groups,” Taerk told INN.

Nawan Butt, portfolio manager with Purpose Investments, said a sweeping change in the way cannabis is regulated at the federal level in the US would affect the current outlook for MSOs.

“Then it's not just the MSOs competing with each other at that point,” he said. “They're going to all of a sudden compete with (consumer packaged goods) and alcohol, and all these industries that are just on the side right now taking a look at an industry from the outside."

The financial expert, who co-manages the Purpose Marijuana Opportunities Fund (NEO:MJJ), said that from his perspective, MSOs would benefit more from seeing “incremental reform ... rather than comprehensive reform. That is absolutely true.”

Banking aid won't necessarily mean cannabis legalization

Despite all the chatter around the advantages MSOs may be reaping right now, one thing is clear: they are in need of banking reforms.

“The MSOs would love banking,” Carr said. “I think banking, to me, is still kind of like one of the easiest and most sensible kind of things to pass.”

Carr was referring to the popular SAFE Banking Act, an eagerly anticipated piece of legislation that would end the roadblocks cannabis MSOs see in their day-to-day operations.

Butt of Purpose Investments explained that the SAFE Banking Act would be a huge help for MSOs' operations, but said it would not bring along federal legalization.

“The SAFE Act does not support decriminalization or legalization of cannabis,” he said. It would stop at the banking rules it seeks to change surrounding cannabis businesses.

“(MSOs) would really love to be able to continue to expand and operate their company like a normal business, instead of this state-by-state vertical with cash only,” Carr said. “It’s a very expensive and difficult to operate.”

Butt sees a heavy burden on MSOs by way of taxes, which won’t go away until changes are made to Section 280E of the Internal Revenue Code. This ruling opposes illegal drug businesses from performing standard tax activities.

“Some of these companies are paying up to 80 percent effective tax rates, which is absolutely ridiculous,” he said. “They'd love to make more money here, but the problem is they end up paying a lot to the IRS.”

Investor takeaway

Cannabis operators in the US have expanded significantly from their humble beginnings.

As the favorites of numerous cannabis financial experts, these companies are expected to continue growing and are seen snapping up significant shares of the most attractive state markets in the nation.

Moving forward, the question becomes: What happens after significant regulatory changes in the US?

Despite the burdens that they carry, MSOs have seen some advantages thus far, and it's uncertain how a federal legalization scenario could play out for them.