- Area: Health Sciences
- Program: Health and Wellness
- Program: Health Professions
- Type of Writing: Essay (Analytical, Interpretive)
- Course Level: 1000
- English Speaking Nativeness: Native
- Year: 2021
- Paper ID: HS.H.a.W.H.P.E.1.N.2.2.2191
Cannabis: The financial restraints in an emerging global market
The whispers of marijuana legalization continue to grow louder in the chambers of the US legislative body. As more states and countries are making the move to legally permit the use and sale of marijuana for recreational use by adults, investors are pouring billions into growing pot companies. The evolving regulations, which are more reactive and adaptative than ever, are struggling to keep up with the massive growth in this budding industry. As we see countries such as Uruguay, Canada and Mexico legalizing marijuana on a federal level, we see investors jumping on the opportunity to position themselves in an extremely profitable, nearly 25 billion dollar market, those investors are shying away from opportunities in the US and rather seeking investments abroad where the legal marijuana market is active and thriving. Investors are eager and waiting for the US market to open, and for the regulatory hurdles to drop so the US can catch up to the other countries that have the first mover advantage.
Publicly traded marijuana companies have been around on the North American Stock Exchange since Medical Marijuana Inc. first took their company public in 2009. It has been a rollercoaster ride since that first day. While Medical Marijuana Inc. may not have taken off, many other companies have also gone public such as Canopy Growth Corp. (Nasdaq: CCG), Sundial Growers (Nasdaq: SNDL), Aphria Inc. (Nasdaq: APHA), and Tilray (Nasdaq: TLRY). These companies have found massive amounts of capital, mostly from retail investors throughout the years. Institutional investors are still limited and hesitate on going all in on any pot stocks. Aphria and Tilray, who are, at the time of writing, proposing a merger to become one of the largest cannabis companies in the world (“Aphria Tilray Merger”), find themselves with institutional ownership of 15.7% for Tilray (“TLRY Tilray, Inc. Stock Quote”) and 19.12% for Aphria inc. (“APHA Aphria Inc. Stock Quote”) When compared to more common “blue chip stocks”, such as Disney, who has 67.10% institutional ownership, it is evident that investment groups and hedge funds are still steering clear of pot stocks. When the chatter of marijuana legalization begins in the US legislative bodies, the investors pour in, betting on the success of these Canadian companies. Unfortunately, large investors are finding too many complications to make the same bet. When the excitement of legalization slows in the US, the companies don’t see these smaller investors taking long positions.
One of the largest factors preventing these publicly traded companies from finding long term institutional investors is that cannabis companies are limited when it comes to using US banking institutions. With marijuana remaining as a schedule 1 drug in the US, banks are unable to do business with cannabis companies without exposing themselves to potential prosecution for money laundering. “Without banks, state-compliant cannabis businesses can’t accept credit cards, acquire loans, set up deposit accounts, write checks, run payroll or pay taxes.” (Hoban, 2020) While there is no sign that the department of justice is or has the intention to prosecute any bank involved with the cannabis market, bank fears still exist. So much so, that during changes of presidential administrations, banks have been known to close long term accounts that have any relation to marijuana. In one such case, an organization dedicated to lobbying government for marijuana reform had its account closed when the Trump administration came into office. (Snead. 2021)
There have been efforts to close the gap between federal regulation and state regulation and open the opportunities for the marijuana market. Senators Warren and Gardner have introduced the SAFE banking act, “which seeks to normalize the banking of cannabis by prohibiting federal bank regulators from taking certain actions against financial institutions.” (Banking. 2021) Unfortunately, that measure has failed multiple times so the finance world is still mostly closed for those engaged in the cannabis business.
This might not be all bad, except when it comes to the opportunity the US is missing by restricting growth of cannabis companies. As time goes on, the window of opportunity continues to close. Canadian companies have a leg up currently, but it could change if the US market opens and cannabis companies are permitted to franchise and grow. If Canadian companies take the advantage now and partner with growers in countries such as Mexico, there is little telling what kind of explosive growth we could see in Canadian based cannabis companies. It isn’t total paradise however in Canada. Regulations vary from province to province and they can be tricky to navigate when attempting to franchise across provinces. Even with the patch-work regulations, changing from province to province “Canada still possesses great potential as a jurisdiction in which to incubate, develop, and expand a franchised network of cannabis retail locations.” (Hunt. 2019) We will continue to see more investors looking to our Canadian neighbors until financial barriers are removed locally.
While the investors seek returns from investing in Canadian companies, those same companies have the opportunity at this point, to expand their growing operations in Southern countries, whom have small farmers already involved in growing cannabis crops. When the speculative bubble grew in 2018, cannabis companies sought to take the influx of capital and capture the emerging markets and experienced farmers in traditional producer states and reap the benefits of the profits they would find. The growth of their stock prices proved unsustainable and overvalued and so when the inevitable crash happened, the expansion into southern countries died on the table. (David Bewley-Taylor. 2020) As of now, international trade between traditional producer countries and the expanding cannabis companies has yet to come to fruition.
The inconsistent international policies and US financial regulations are preventing the legal cannabis market from exploding further. The economic benefits from an emerging market susceptible to high tax rates aside, employment opportunities and international trade agreements will emerge when the dust settles from the changes in the legal status of marijuana worldwide. It seems obvious that the legal status of marijuana complicates the international business, but the largest roadblock isn’t just the US drug schedule. It can be surmised that the largest hurdle to leap over currently is the finance regulations scaring away banks and long-term investors. If the US doesn’t make changes quickly, the first mover advantage will fall to the Canadian companies, and when the market finally opens, the US will be racing to become the world leader in the cannabis economy and will struggle to catch up to the companies that have been planning and positioning themselves for years in legal markets to become the largest international suppliers of cannabis in the world.
“TLRY Tilray, Inc. Stock Quote.” Finviz, finviz.com/quote.ashx?t=TLRY. Accessed 9 Apr. 2021.
“APHA Aphria Inc. Stock Quote.” Finviz, finviz.com/quote.ashx?t=apha. Accessed 9 Apr. 2021.
“Aphria Tilray Merger.” Aphria Tilray Together, www.aphriatilraytogether.com. Accessed 9 Apr. 2021.
Snead, Adrian F. “Banking Marijuana Business: A PRIMER ON THIS EMERGING FIELD.” Judges’ Journal, vol. 60, no. 1, Jan. 2021, pp. 17–26. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=asn&AN=148239548&site=eds-live&scope=site.
Hoban, R. (2020, August 18). The Cannabis Industry Needs Banking Now. Forbes. https://www.forbes.com/sites/roberthoban/2020/08/18/the-cannabis-industry-needs-banking-now/?sh=2d6b58df3a58
Hunt, Danielle, and Vanessa Williams-Hall. “A Tale of Two Countries: Does Canada’s Legalization of Cannabis Give It the First Mover Advantage in Franchising?” Franchise Law Journal, vol. 39, no. 1, Summer 2019, pp. 55–80. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=asn&AN=139320794&site=eds-live&scope=site.
Banking and Cannabis Enforcement Round Up: NCUA Imposes First Penalty Relating to Cannabis Banking Services; Cannabis Industry Execs Convicted of Defrauding Banks into Providing Financial Services; Congress Re-Introduces the SAFE Banking Act. (2021, April 7). JD Supra. https://www.jdsupra.com/legalnews/banking-and-cannabis-enforcement-round-3320576/
David Bewley-Taylor, et al. “Cannabis Regulation and Development: Fair(Er) Trade Options for Emerging Legal Markets.” Revue Internationale de Politique de Développement, vol. 12, Sept. 2020. EBSCOhost, doi:10.4000/poldev.3758.