Happy New Year and welcome as The Blunt Truth enters its seventh year of publication.
Last month, I participated in a panel at CannaVest West, the cannabis industry summit held in San Francisco. This took place in the days just before the Omicron variant dominated the news, and was therefore reasonably well attended by industry professionals. I would like to share some of the conference buzz with you.
Federal legislation the legalization or de-listing of cannabis is not an immediate one. 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 it. What does that mean? This means that the cannabis business will still be conducted state by state, while some members of Congress will continue to advocate for the federal legalization or decriminalization of cannabis.
The same goes 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 havens for certain types of cannabis-related banking services. The Senate, however, removed the SAFE Banking Act from the defense bill shortly before passing it, marking the fifth unsuccessful attempt to pass the legislation. While more than 650 financial institutions provide some services to the cannabis industry, widespread national banking for the industry is still pending and not expected to happen in 2022.
Section 280E of the Internal Revenue Code will continue to be a very unpleasant reality. Section 280E denies cannabis businesses deductions for ordinary, necessary and reasonable business expenses, thus turning what should be a net income tax into a gross income tax. Surprisingly, many cannabis business owners still ignore, or choose to ignore, the impact of Section 280E and end up with hundreds of thousands or even millions of dollars in taxes, interest and penalties.
Multistate Operators (MSOs) will be very active in mergers and acquisitions over the coming year. Partly due to the lack of federal marijuana legalization and partly to satisfy shareholder demands, MSOs will continue to grow in 2022, in most cases through mergers and acquisitions activity. The main target? One-state operators. MSOs will seek to grow their footprint as more states implement state legalization of cannabis and/or open licenses to non-state interests. A pitfall for single-state operators and others seeking acquisition – non-compliance with 280E.
The timeline between legalization and implementation is poorly understood. 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 each other over the ability to regulate and tax marijuana, lawsuits alleging unfair licensing criteria to resolve, and finally, regulations to be drafted containing the details of how whose cannabis businesses will license and operate. The waiting time ? One year minimum, sometimes two or three. Each state has its own laws, its own way of operating and it takes time to sort out policy and regulatory issues and “improve” what other states have done. The only state that is the exception that confirms this rule? Arizona – the adult-use voting 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 surge in the globalization of the cannabis industry. For the United States, this means both inbound and outbound transactions will increase. Since Canada legalized cannabis, American companies have gone public on Canadian exchanges. More recently, there have been acquisitions involving several different countries, including Israel and Colombia. Investors from Eastern Europe and Asia are actively seeking acquisitions in the U.S. cannabis industry, both non-herb and herbal businesses. A number of US cannabis companies are considering acquisition targets in different countries to capitalize on international sales. Mexico has attempted to legalize cannabis use by adults and may do so in 2022. Europe remains a big question. Will European countries (other than Luxembourg and Malta) legalize adult consumption and open their cannabis industries to international investment or will European countries take more of a pharmaceutical approach with medical marijuana becoming available in pharmacies around the world? 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 great opportunity for serious industry professionals to exchange ideas and reconnect in person.
#Buzz #CannaVest #West