Institutional Investors Eye Cannabis, But Regulatory Hurdles Remain

Feeling better, but not buying

ATB Cormark’s fall investor sentiment survey found that nearly half of the institutional investors felt more bullish on US cannabis stocks than six months earlier, and none felt more bearish, but nearly two-thirds hadn’t changed how much money they had in the sector.

The twice-yearly survey asked 17 institutional investors, almost all of them invested in US cannabis companies, between September 21 and 29, right as the rescheduling case was paused due to a request from opponents to add a government watchdog report finding the DEA has no written rules for how it reviews drugs to the hearing record.

Gomes said the reason is structural.

“As it stands right now, most institutions can’t invest because of regulatory reasons, compliance reasons,” he said, as recreational cannabis is still a Schedule I substance and federally illegal. That status keeps most US cannabis companies off the major US stock exchanges, so their shares trade in Canada instead. That creates a second problem for big funds, Gomes said. “The stocks trade on second-tier exchanges in Canada, so you don’t have the liquidity that would also be necessary for these institutions to invest.”

In other words, it’s hard for big funds to buy or sell shares in the amounts they need.

Gomes said rescheduling is what would start to change both. The federal government already took the first step in April, moving state-licensed medical cannabis to the less restricted Schedule III category, which he said got investors “more excited and more bullish.” But recreational cannabis is still waiting. “Until we see (reform) happening, I think we have to wait for capital to come in,” he said.

What the delay costs

For companies, the biggest financial question is taxes. A federal tax rule known as 280E stops businesses selling Schedule I drugs from deducting normal costs such as rent and payroll. Rescheduling would end that, and the industry had hoped relief would apply to 2026.

Gomes said the cost of the delay isn't clear yet. “There’s the expectation or the hope that the IRS is going to provide some sort of retroactive relief,” he said, potentially going back to 2023, when federal health officials first recommended rescheduling. If it doesn't, companies will carry the full 2026 tax bill on their books.

For investors, the cost is the wait itself, which Gomes called an opportunity cost for institutional capital.

“It’s hard to keep waiting and waiting and waiting, and this thing gets delayed again,” he said. That frustration helps explain the gap in the survey: medical rescheduling made investors more bullish, but their money hasn’t followed yet.

The wait has only gotten longer since ATB Cormark ran its survey, and Gomes said the results could very likely look different today.

On October 22, the US DEA judge overseeing the rescheduling case refused a request from opponents to reopen the hearing, saying they had already had enough chance to make their case at the summer hearing, but allowed one more round of written arguments that runs to November 5. He has set no date for his recommendation, which is the last expected step before the DEA makes a final decision.

Speaking a week before that ruling, Gomes, who remains firm in predicting an early-2027 timeline for recreational rescheduling, said that if he ran the survey again, “investors would maybe not say they were that much more bullish, and I think they would assign a lower probability for rescheduling, given the delays in the process that were very much unexpected.”

Ready for the green light

Gomes said companies have already done the work to move their listings to the Nasdaq or New York Stock Exchange once rescheduling happens. Many have moved their legal home to the US or combined shares to meet the exchanges’ minimum share price.

One company didn’t wait. Trulieve (NYSE:TRLV) got onto the New York Stock Exchange in June by splitting off its recreational business and keeping its medical business. Gomes called it “a very specific case.”

“They were able to do this because most of their business was medical. That’s not true for most of the sector,” he said, adding that other operators will need full rescheduling first. The exchanges, he said, “have been very active in conversations with the companies, and it looks like rescheduling would be enough for the exchanges to actually allow the uplistings.”

Rescheduling would also make it easier for companies to buy each other, something investors increasingly want. In ATB Cormark’s survey, buying other companies tied with paying down debt as the top priority for spare cash. Gomes said years of struggle have left many assets for sale at a good price, and that higher share prices after rescheduling would let companies pay for deals with stock without giving away as much of the company.

Higher share prices would also help with debt. “Most of the US companies, I would say, are more leveraged than we would like,” Gomes said. “The good news is that without 280E, they are actually generating free cash flow.” If valuations improve, he expects some companies to sell new shares and use the money to pay down debt.

The catalyst investors are missing

While rescheduling would lift the 280E tax burden on recreational sales and open the door to the major US exchanges, Gomes argued the federal ban on intoxicating hemp products, set to take effect December 11, could matter more to company results than rescheduling, because medical companies already got relief from the 280E tax rule in April.

Only a quarter of the investors ATB Cormark surveyed ranked the ban as a top reason to invest. “I think it's just a matter of everyone’s focus on rescheduling because it is the main catalyst, and so no one’s sort of paying attention to the hemp ban,” Gomes said. “Many of them don't actually realize how big the hemp market is in the US.”

The ban would make most hemp-derived THC drinks, gummies and vapes illegal under federal law. Gomes doesn’t expect all of that demand to move to licensed stores, but said a large share could if the ban is enforced. “Right now you have legal dispensaries, and then you have hemp shops close by, just at the corner, selling essentially the same product,” he said. “The question is, what's the magnitude of that shift?”

Canada's value is overseas

Gomes said most investors calling for deals have US companies in mind. But one of the biggest deal fights in cannabis right now crosses the border, and it shows where buyers see value in Canadian producers: not in Canada’s recreational market, but in supplying medical cannabis overseas.

US cannabis company Curaleaf Holdings (CSE:CURA,OTCCURLD:QX) made an unsolicited offer for Aurora Cannabis (TSX:ACB,NASDAQ:ACB) in August and raised it on October 5 to about US$5 per share in Curaleaf stock and cash. Aurora’s board has told shareholders to reject it, saying the offer undervalues the company, and is weighing other options, including interest from Canadian producer Organigram Holdings.

Curaleaf has accused the board of shutting it out of talks. Its offer is open until December 4.

Gomes said that’s what Curaleaf is after. Aurora has largely left Canada’s recreational market and sells mostly medical cannabis abroad, especially to Europe and Australia, and Curaleaf, which already has the industry’s largest international business, needs more cannabis grown to European pharmaceutical standards.

“Canada has very valuable assets on the global cannabis landscape because Canada is the largest supplier of cannabis for the world,” he said.

Even so, ATB Cormark’s survey found Canadian cannabis is “still overlooked by institutional investors.” For investors in Canadian producers, the bid is a test of what that overseas business is worth.

What to watch

Beyond rescheduling, Gomes is watching three things heading into 2027: whether the hemp ban takes effect and is enforced, whether falling cannabis prices keep stabilizing after three years of flat industry growth and when Texas issues licenses to open its medical market.

He said a return to growth would matter most for investors. “If you are back to growth, then it becomes more attractive,” he said.

The next date to watch on rescheduling is November 5, when the last written arguments are due. Gomes said that once the decision comes, companies are ready to move fast, with listings on major US exchanges possible within weeks.

Until then, he expects most institutional money to keep waiting.