Government and Policy Trends

Tilray became the first US IPO on Nasdaq on July 19th by a marijuana company.  The company priced 9 million shares at $17 apiece and by the end of the day, closing at $22.39, a jump of slightly more than 32 percent on day one. As the date of posting this blog and the second day of trading, the price has hit a high of over $31, another jump of approximately 38 percent.

What does this mean?

Clearly the national securities exchanges (i.e. NYSE and Nasdaq) in the United States are getting increasingly comfortable with the listing of plant-touching businesses operating in Canada.  What they are not comfortable with, are plant-touching businesses operating in the United States.  As a result, plant-touching businesses operating in the United States – except for Colorado – are only able to list on either a Canadian exchange (i.e. the CSE) or on the over-the-counter-bulletin (i.e. OTCQB or OTCQX).

Tilray’s total revenue in 2017 was only $20.5 million but its resulting valuation on the public market is a multi-billion dollar valuation.  Thus this company has taken advantage of the United States robust public markets that NO plant-touching operating business in the United States can even list with because of the fact that marijuana is still illegal at the federal level.

I wonder what the valuation of these Canadian companies would look like if our much stronger United States’ companies were afforded the same opportunities and there was a change in federal law in the United States?  There are companies in Colorado that have operated for almost 10 years and have annual revenues in excess of $100 million…I have a feeling there would be a substantial market adjustment for many of these public companies.

 

The bill, known as the Hemp Farming Act of 2018, would legalize hemp, removing it from the federal list of controlled substances and allowing it to be sold as an agricultural commodity.  “By legalizing hemp and empowering states to conduct their own oversight plans, we can give the hemp industry the tools necessary to create jobs and new opportunities for farmers and manufacturers around the country,” McConnell said in a statement last week introducing the bill. The bill has bipartisan support.

This bill also seeks to end the grey area surrounding hemp-derived CBD extracts: “The term ‘hemp’ means the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

What does this mean?

As I have previously stated, my hope was that this bill would not only deschedule industrial hemp as a controlled substance but provide clarity regarding hemp-derived CBD. This bill has done exactly that and now what remains to be seen is can Sen. McConnell get this over the finish line in its current form?

 

Canada’s attempt to finalize its marijuana legislation making it the second country to legalize adult use marijuana (after Uruguay) hit a snag when Health Minister Ginette Petitpas Taylor conceded yesterday it won’t be done in July 2018.  New timetables based on legislative necessity target August or September of 2018.  As a result, many of the publicly traded Canadian cannabis companies stock price took a multi-point dip today.  As the various states in the United States that have legalized adult-use marijuana can contest, implementing regulations for a brand new industry is full of complexity and challenges.  Canada’s marijuana market will continue to be frothy in the near term but they are well on their way to being a dominate player in the marijuana industry because of the full support of its government (unlike the United States).

Attorney General Sessions rescinded, effective January 4, 2018, previous enforcement priorities of the DOJ related to marijuana – including the Cole Memo. The Sessions Memo dictates that federal prosecutors should follow the “Principles of Federal Prosecution” originally set forth in 1980 and subsequently refined over time in chapter 9-27.000 of the U.S. Attorney’s Manual. Sessions goes on to state in his memo that “These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” It is important to note that Sessions has not previously set any specific enforcement priorities with respect to marijuana, nor has this memo created any new enforcement priorities of the DOJ. Rather Sessions has removed the foundational guidance that states have relied on to regulate the production and distribution of marijuana pursuant to state law and the will of each states’ citizens. The Cole Memo actually set 8 enforcement priorities for the DOJ with respect to marijuana, which Sessions has now unilaterally rescinded.

Continue Reading The Sessions Memo

Sen. Cory Gardner of Colorado wants to attach an amendment to the GOP-led tax reform bill that would allow state-legal marijuana growers, processors and sellers to deduct normal businesses expenses from their taxes.”  Section 280E of the tax code, forbids businesses from deducting otherwise ordinary business expenses (advertising expenses, insurance, employee wages, etc.) from gross income associated with the “trafficking” of Schedule I or II substances. The IRS has subsequently applied Section 280E to state-legal cannabis businesses, since cannabis is still a Schedule I substance under the Controlled Substances Act.  Gardner’s amendment will include a 280E fix so that the provision no longer applies to marijuana businesses that operate in accordance with state or local laws.

What does this mean?

A 280E fix would be monumental for the cannabis industry.  The inability for state-legal cannabis businesses to take deductions for normal business expenses has the potential to cripple the industry if not addressed in the near future.  While I believe that getting this amendment in on the tax bill is a moon shot, I hold out hope that it is still a possibility.  At a minimum, the GOP is finally listening to the plights of our industry and is attempting to be part of the solution.

 

Vermont may become the 9th state to allow recreational marijuana and the 1st state to do so via legislation. Last Wednesday, the Vermont house approved a bill 79-66 which would create a regulatory structure for the cultivation, processing, sale and use of recreational marijuana by July, 2018. The Vermont Senate previously passed the bill with a 20-9 vote. The bill will now be sent to the Governor for a veto, signature, or no decision, only a veto would prevent it from becoming law. The other 8 states that allow recreational marijuana have done so through voter referendums.

July 2018 is not a random date, the bill references two neighboring states, Maine and Massachusetts, which will allow retail stores to sell marijuana in July 2018. Another border neighbor-Canada is looking at Summer 2018 for when licensed retail stores will begin selling marijuana as well.

We will update this blog either when the Governor acts on this bill or Ben & Jerry’s commemorates the passage with a new ice cream flavor. We are anxiously awaiting both.

Last week, the DOJ sent a letter to trustees who handle consumer bankruptcy reminding them that marijuana is a federally illegal drug and warned them not to handle any money from the sale of marijuana-related property.  The letter goes on to state “Our goal is to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets.”

What does this mean?

Colorado courts have already dismissed numerous cases where the company was engaged in state-legal marijuana cultivation and sales, so this is nothing new.  However, this letter might be illustrative of Attorney General Sessions’ previous statements that the DOJ will increase legal scrutiny on marijuana.

While it is clear that marijuana business likely do not have federal bankruptcy protection based on the current law, there are state laws regarding the receivership and assignment for the benefit of creditors that can be utilized to assist a failing marijuana company deal with its debts.

Young cannabis plants, marijuanaThe Colorado adult-use marijuana industry is off to a record-setting start in 2017, with sales increasing by more than 30% over figures from 2016.  This is on the heels of a record setting $1.3 Billion in sales last year and threats over a federal crackdown on adult-use marijuana.

What does this mean?

If the trends hold, 2017 will be the third-year in a row for Colorado seeing dramatic growth.  While there are numerous factors driving the increase, the linked article points to “hoarding” by regular users if their access is denied by the DOJ.  I would also point to wider acceptance from the community in general, less fear mongering of the dangerous of adult-use marijuana by the anti-legalization movement and more diverse product offerings from the industry.  Subject to federal intervention by the DOJ, I expect the adult-use marijuana industry to continue to grow and expand for several years to come.