What Will a Post COVID-19 Cannabis Industry Look Like?

Public opinion towards cannabis is beginning to change amid the coronavirus crisis, and it could signal a tectonic shift in the larger market.

Although we have written extensively about the economic impact of the COVID-19 outbreak, it may be instructive to consider the potential effect that the pandemic will have on the cannabis legalization movement.

While marijuana remains illegal in the US at the federal level, by 2020 there were already 33 states that had legalized its use for medical purposes, along with a further 11 where recreational cannabis is also legal.

Illinois officially kicked off its first day of adult-use marijuana sales in January this year, and New York was considering legalizing recreational cannabis until the unprecedented spread of coronavirus forced the state government to place the project on indefinite hold.

Despite this ever-growing voter preference [for cannabis legalization], current federal law continues to prevent banks from safely banking these businesses without fear of federal sanctions. As a result, this segment of our local economies is forced to operate on an all-cash basis, which creates serious public safety, revenue administration, and legal compliance concerns in the communities we serve. Letter to Congress from the US State Bankers Association

Unfortunately, several significant roadblocks still remain in place for the US cannabis industry, despite the plant's growing mainstream acceptance with American consumers.

And the most glaring of these issues is the federal government's ongoing failure to enact safe harbour legislation for the insurance and banking sector, which has forced US cannabis companies to operate without easy access to insurance coverage or financial assistance.

This is partly the result of America's labyrinthian legal system, which forces cannabis companies to operate within a complicated maze of state and federal regulations which can make it virtually impossible to do business.

Additionally, the continuing illegality of cannabis at the federal level means that even if it is possible, many companies view the prospect of providing the cannabis industry with insurance coverage or additional funding with extreme trepidation, as they are concerned about the potential risks involved, both legal and reputational.

This presents a significant obstacle for the US cannabis industry to overcome, as financial liquidity and adequate insurance coverage are two of the key methods that businesses use to mitigate risk and remain afloat during times of hardship.  

While it may be easy to assume that this situation is largely the result of America's inconsistent approach to cannabis legalization, one only needs to look to the Canadian cannabis industry—where adult recreational use is federally legal—to see that this is simply not the case.

Despite voting to legalize marijuana in 2018, many Canadian cannabis companies—excluding multibillion dollar giants like Aurora Cannabis Inc. (TSX:ACB) and Canopy Growth Corp. (NYSE:CGC)—say that financial institutions are still extremely reluctant to provide them with any form of financial support.

According to the CEO of Phytron Technologies, Bob Potter, cannabis legalization has done little to help his company's prospects of securing additional financing or even opening a bank account, which has forced many marijuana-oriented businesses operating in the Great White North to deal exclusively in cash.     

"Nothing seems to have changed. It makes it tough," Potter said.

"As soon as you mention the cannabis business, they say 'No, can't help you'."

And Potter's experience is hardly unique, as the CFO of marijuana retailer Muse Cannabis Store, Mike McKee, reported a similar experience when attempting to acquire funding—which led to rejections from multiple credit unions—for an expansion of its commercial network.

"A year ago as legalization was coming on, we were getting mixed messages from the banks about what their policy was going to be once cannabis was legalized, and most of them put it off until after legalization," McKee said.

"I was running around meeting so many different people and bankers trying to get something sorted out. It was a lot of meetings. Basically, I got turned down at every one, except Bank of Montreal."

Luckily, the US has started to take some steps to address this issue, in the form of safe harbour legislation which is currently making its way through congress.

Room for Reform

The Safe and Fair Enforcement Banking Act—or the SAFE Banking Act—has already made its way through the House of Representatives, and if passed would provide a legal harbour that would allow banks and insurers to work with US cannabis companies.

While it has yet to pass through the Senate, many of its proponents are reasonably confident of the legislation's eventual success, as it has significant bipartisan support.

Massachusetts was the first state to pass explicit equity measures in the adult-use cannabis industry for farmers, veterans, women, minorities and those disproportionately harmed by drug laws. The lack of federal PPP support puts the fragile progress we have made over the past three years at risk. The harm is likely to fall more sharply on the very small businesses, workers, families, and communities that our state's cannabis equity measures are intended to protect. Massachusetts Cannabis Control Commission member, Shaleen Title

In fact, its potential introduction is also being loudly promoted by the financial sector itself, which resulted in the US State Bankers Association recent publication of an open letter to Congress arguing passionately for the legislation's passage.   

"Although we do not take a position on the legalization of marijuana, our members are committed to serving the financial needs of their communities – including those that have voted to legalize cannabis," the letter stated.

"The impact on our local economies could also prove significant, as revenue paid to unrelated industries that provide products and services to state-authorized cannabis businesses such as law firms, accountants and contractors is technically money derived from illegal activities, and thus could be considered money laundering."

"This raises the significant question of whether financial institutions can bank these ancillary businesses, as such actions could likewise be considered violations of the money laundering laws. Without a change to federal law, that entire portion of economic activity in legal cannabis states may be marginalized from the banking system."

However, it looks like the cannabis industry will have to hold out a little longer, as the arrival of COVID-19 has slowed the legislation's progress considerably, after more than 43 states authorised mandatory stay-at-home orders for all non-essential workers.

Fortunately, cannabis companies have been deemed an essential business in at least 28 US states where marijuana is legal, while several jurisdictions have also allowed for curbside pickup or prescription through telecommunications services.

The Massachusetts state government is even considering a COVID-19 relief bill specifically aimed at cannabis companies, after it was introduced during a legislative hearing in early May.

The proposal was tabled by the Joint Committee on Community Development and Small Businesses, and if passed will address some of the issues that cannabis companies are grappling with during the coronavirus pandemic.

"The creation of a Massachusetts PPP loan for cannabis businesses like mine would be a momentous step in the right direction to remedy the inequity that legal, tax-paying cannabis-related businesses like mine are facing during the COVID-19 crisis," ELEVATE Northeast executive director Beth Waterfall said.

Industry leaders and stakeholders have urged the Massachusetts government to adopt bill, which they argue will help businesses stay above water and prevent further layoffs.

The CEO of recreational marijuana company T. Bear Inc, Angela Brown, told Massachusetts lawmakers that her business was forced temporarily shutter its doors just one day before it was due to begin its first day of sales.

"We were forced to furlough our entire team, lock the building and walk away. All I can do now is wait with no income and no revenue. And while I wait, I still pay my rent, my lenders, my utilities and my health insurance for my furloughed employees," Brown said.

"All small business owners are dealing with these issues. The bills and debt continue to mount as the shutdown prolongs. But the difference is that cannabis companies don't even have access to this economic relief."

This experienced was echoed by the majority of business that elected to testify before the committee, including an executive for cannabis retail chain Garden Remedies, Brian Moran, who explained that the arrival of COVID-19 has, "resulted in a perfect storm for our industry that has caused massive problems."

"Not only [has Garden Remedies] lost the vast majority of our revenues when the state-mandated essential services order was enacted in late March but the lifeline extended to help small businesses across our country survive during this pandemic has not been extended to us," he said.

Future Looks Green

The US state Banking Association made its plea to Congress to pass the SAFE Banking Act in early March—less than a week before the lockdowns began—and since then further progress has been largely stymied.

Although, the bill's chief sponsor, Democratic Representative Ed Perlmutter, has been working to persuade his colleagues to incorporate elements of the SAFE act into COVID-19 relief legislation, despite the original bill's lack of forward momentum.

However, the coronavirus pandemic may have also inadvertently strengthened the argument for cannabis legalization at the federal level. After all, dozens of states across America have already demonstrated that they consider marijuana providers to be an essential service—akin to pharmacies and supermarkets—which should further legitimize the cannabis sector's status as a reputable, reliable industry.

The SAFE Banking Act is a banking-specific solution that would address the reality of the current marketplace and allow banks to serve cannabis-related businesses in states where the activity is legal. It respects state sovereignty and does not facilitate cannabis sales in states that have chosen not to legalize the drug. Letter to Congress from the US State Bankers Association

In fact, it may pave the way for banks and insurers to find new ways to work with the cannabis industry, which can already be seen in the recent push from the National Association of Insurance Commissioners to outline a method for regulators to bring insurance coverage to the marijuana sector.

And in a post COVID-19 economy, the prospect of federal legalization—which has the potential to generate millions of jobs and billions in tax revenue—may be too tempting for US lawmakers to ignore.

Even the cannabis sector's status as a neophyte industry—with a dearth of "predictable data"—may no longer be a drawback, as the coronavirus shutdown has rapidly upended the structure of most western economies.

Previous metrics for determining reliable cash flows and potential ROI may no longer apply, and once the pandemic is over, we may find that cannabis companies offer more predictable revenue streams than many legacy industries that were unable to remain open during the quarantine shutdown.

The cannabis industry could even end up looking relatively stable by comparison, as other businesses rapidly scramble to adjust to the new economic reality we've found ourselves in.

Additionally, there have been several promising signs from the US and Europe which indicate that the global cannabis market may be starting to starting to return to life.

In late May, the share price of several major pot stocks began to climb in value after news broke that a Canadian study had been published showing that cannabis may help boost coronavirus resistance.

Shares in Tilray (NASDAQ:TLRY) spiked in value by almost 20%—climbing to 9.65 apiece—before experiencing another 2 percent increase the following day. Canopy Growth (NYSE:CGC) also saw its share price surge by 7.8%, reaching almost $18.35 before the end of the week.

Aurora Cannabis also recorded a boost of more than 36%—following an announcement that it was acquiring US CBD company Reliva—after experiencing a significant decline in recent weeks due to doubts about the company's short-term revenue potential.

Similarly, there was a flurry of excitement from the market following the recent announcement of an agreement by US private equity fund Artemis Growth Partners to acquire British cannabis producer, Bridge Farm, for £66 million.

The fund already manages a large portfolio of companies that either sell or work with marijuana, and many experts believe that the deal could potentially accelerate the legalisation of cannabis in the UK.

The fund's partners even confirmed that they expect the massive economic pressure being exerted on markets around the world—as a result of the COVID-19 epidemic—to push additional governments to legalise cannabis.

"In the cannabis space, there is no equal asset to Bridge Farm. For us, this is incredibly opportunistic. The acquisition of the farm has offered the fund a unique opportunity. There really is no equal globally to the combination of team and asset at Bridge Farm," Artemis Growth Partners co-founder Will Muecke said.

"We're going to find budgets around countries to have giant gaps, and the economics are overwhelmingly in favour of governments jumping ahead and legalising cannabis and finding near-term revenue there."

According to a senior policy analyst from drug reform advocacy group Transform, Steve Rolles, the acquisition signals a growing shift in the landscape of the cannabis legalisation debate.

"The UK may be ahead of the game on medical cannabis production but we are way behind on actually making medical cannabis available. And unlike the UK, other countries like Canada, Uruguay, Mexico and Luxembourg are taking steps to legally regulate non-medical cannabis markets as well," Rolles said.

"Those reforms are changing the public debate globally, and helping shift opinion on wider legalisation in the UK too. The question is not if we should legalise, but how to do it properly."

This pot stock could reach new heights in 2020 due to Coronavirus

The COVID-19 pandemic is showing no signs of slowing down, and as global markets enter meltdown many cannabis companies are feeling the effects of capital crunch.

While the market crash will continue for some time, it represents a golden opportunity for investors who are capable of riding out the volatility until share prices rally.

Luckily, one pot stock has developed antimicrobial drug that can already treat two superbugs while limiting their ability to develop antibiotic resistance.

Investors can also start picking up shares at rock bottom prices, as global investor sentiment continues to dampen thanks to COVID-19.

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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