Happy New Year and welcome back as The Blunt Truth begins its seventh year of publication.
Last month I was on a panel at CannaVest West, the cannabis business summit held in San Francisco. This was held in the days just before the Omicron variant dominated the news, so was reasonably well attended by industry professionals. I would like to share with you some of the buzz from the conference.
Federal legislation legalizing or de-scheduling cannabis is not in the immediate future. For some time now, industry leaders have been saying publicly that federal legislation is just around the corner. Well, it’s not, and those in the industry have come to recognize this. So, what does this mean? It means that cannabis business will still be conducted on a state by state basis while some members of Congress continue to advocate for federal legalization or decriminalization of cannabis.
The same is true for cannabis banking legislation. In September, the House passed a version of the National Defense Authorization Act for Fiscal Year 2022 which included the SAFE Banking Act, which would have provided safe harbors for certain types of cannabis banking services. The Senate, however, removed the SAFE Banking Act from the defense bill shortly before passing it, marking the fifth failed attempt to pass this legislation. While over 650 financial institutions provide some services to the cannabis industry, widespread national banking for the industry is still on hold and not likely to pass in 2022.
Section 280E of the Internal Revenue Code will continue as a very unpleasant fact of life. Section 280E denies cannabis businesses deductions for ordinary, necessary and reasonable business expenses, effectively turning what should be a net income tax into a gross income tax. Surprisingly, many cannabis business owners are still unaware of, or otherwise choose to ignore, the impact of section 280E and find themselves with hundreds of thousands, or even millions of dollars in tax liability, interest and penalties.
Multi-state operators (MSOs) will be very active in M&A in the coming year. Partially as a result of no federal legalization of marijuana, and partially to satisfy shareholder demands, MSOs will continue to grow in 2022, in most cases through M&A activity. The leading target? Single state operators. MSOs will look to increase their footprints as more states implement state legalization of cannabis and/or open up licenses to out of state interests. One pitfall for single state operators and others looking to be acquired–failure to comply with 280E.
The timeline from legalization to implementation is misunderstood. After a state legalizes marijuana, businesses gear up, real estate brokers start identifying properties, investors start looking for opportunities….and then they wait, and wait, and wait. What are they waiting for? They are waiting for state agencies to stop fighting amongst themselves for the opportunity to regulate and tax marijuana, lawsuits alleging unfair licensing criteria to resolve themselves and finally, regulations to be written that contain the details of how cannabis businesses will get licensed and operate. The waiting time? A minimum of one year, sometimes two or three. Each state has its own laws, its own way of operating and it takes time to work out the politics and the regulatory issues and “improve” on what other states have done. The one state that’s the exception that proves this rule? Arizona – the adult-use ballot initiative passed in November 2020, and sales began in January 2021.
Globalization of the Cannabis Industry. There has been and will continue to be a strong increase in the globalization of the cannabis industry. For the US, this means both inbound and outbound transactions will increase. Ever since Canada legalized cannabis, US companies have gone public on Canadian stock exchanges. More recently, there have been acquisitions involving several different countries including Israel and Colombia. Investors from Eastern Europe and Asia are actively looking at acquisitions in the US cannabis industry, both non-plant touching and plant touching companies. A number of US cannabis companies are looking at acquisition targets in different countries to be able to take advantage of international sales. Mexico has been attempting to legalize adult use cannabis and may do it in 2022. Europe remains a big question. Will European countries (other than Luxembourg and Malta) legalize adult use and open their cannabis industries to international investment or will European countries adopt more of a pharma approach with medical marijuana becoming available in pharmacies as part of a national health system?
The Swag. Exhibitors–you need to step up your game! We all have enough logo pens!
Once again, CannaVest West was a good opportunity for serious industry professionals to exchange ideas and renew acquaintances in person.