A Shift in Federal Marijuana Policy May Be Imminent

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Even as industries from 3D printing to cloud computing and biotechnology are growing rapidly, it's marijuana that's recently been the go-to asset for aggressive investors. According to cannabis research firm ArcView, the legal-weed industry grew by 34% in North America last year to $6.9 billion, and it's slated to grow by a compound annual rate of 26% between 2017 and 2021, reaching an expected $21.6 billion. That type of growth is rarely seen, which is why investors are so excited to jump on the bandwagon.

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Where's this growth coming from, you wonder? The most logical explanation is we're seeing an increase in legalization efforts. Mexico wound up signing into law a bill that legalizes medical cannabis in June, while Prime Minister Justin Trudeau in Canada introduced legislation in April that could pave the way for legal adult-use pot sales by July 1, 2018. We've also seen 29 U.S. states approved medical cannabis since 1996, and eight have given the green light to recreational weed since 2012.

A big change in the way the public views cannabis has also been a prime catalyst for the industry. Roughly two decades ago, only a quarter of Americans surveyed by Gallup wanted to see the drug legalized nationally. As of 2016, this figure had grown to three out of every five respondents. A separate study conducted by Quinnipiac University in April found that an overwhelming 94% of respondents want to see medical cannabis legal across the United States. 

The federal government digs in its heels

Nevertheless, marijuana remains an illegal substance throughout North America. In fact, Uruguay is the only country in the world at the moment to have completely legalized the drug. That marijuana is a Schedule I substance in the U.S., and therefore has no recognized medical benefits, puts businesses that deal in pot at distinct disadvantages.

For example, weed-based businesses have virtually no access to basic banking services, from lines of credit to a checking account. Financial institutions in the U.S. report to the Federal Deposit Insurance Corporation (FDIC), and since the FDIC is a federally created entity, they fear being fined or criminally prosecuted for aiding marijuana-based businesses.

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In addition, companies in the cannabis industry are unable to take normal corporate income-tax deductions. U.S. tax code 280E disallows businesses that sell federally illegal substances, like marijuana, from deducting normal expenses. Thus, pot companies are stuck paying tax on their gross profit as opposed to net profit.

However, there's a bigger concern that could be on the horizon for the U.S. pot industry that extends beyond these well-known disadvantages. Namely, that the federal government could alter its lax stance on regulating the weed industry.

This commentary suggests a shift in federal marijuana policy could be coming

For those who may not recall, now-former White House press secretary Sean Spicer in February announced that the Trump administration was considering a shift away from the lax policies of the Obama administration. Obama and lawmakers were perfectly content allowing states the opportunity to pass medical and recreational cannabis laws as long as they ensured that adolescents were kept away from possessing pot, driving under the influence of marijuana was deterred, and there were steps in place to prevent interstate drug trafficking.

But according to new commentary from the second in command at the Justice Department, U.S. Deputy Attorney General Rod Rosenstein, a possible shift in federal policy could be imminent. From Forbes, here's what Rosenstein had to say in a recent appearance at the Heritage Foundation: 

We are reviewing the policy. We haven't change it, but we are reviewing it. We're looking at the states that have legalized or decriminalized marijuana, trying to evaluate what the impact is. And I think there is some pretty significant evidence that marijuana turns out to be more harmful than a lot of people anticipated, and it's more difficult to regulate than I think was contemplated ideally by some of those states.

Rosenstein went on to suggest that pro-legalization enthusiasts, and even the states that have legalized cannabis in some form or another, have misinterpreted the Cole memo, which outlines the aforementioned criteria that states have to follow to avoid federal regulation. Said Rosenstein:

That's [the Cole memo] been perceived in some places almost as if it creates a safe harbor, but it doesn't. And it's clear that it doesn't. That is, even if, under the terms of the memo you're not likely to be prosecuted, it doesn't mean that what you're doing is legal or that it's approved by the federal government or that you're protected from prosecution in the future.

Sound familiar?

If these ideas sound familiar, it's because Attorney General Jeff Sessions, the No. 1 in command, has long been an ardent opponent of pot. He's even gone as far as to request that congressional leaders remove protections for legally operating medical-marijuana businesses so he could potentially prosecute them. In fact, the House Rules Committee recently blocked a vote on the Rohrabacher-Blumenauer Amendment, which is what protects those legally operating businesses from federal prosecution, strengthening the possibility that Sessions may have the ammo he needs to go after pot companies. 

While it's still unclear if President Trump would sign off on a change in federal marijuana policy given the support the American public has shown for the drug, it's abundantly clear that growth estimates for the industry, and enthusiasm for pot stocks, might be a bit overzealous. Unless we see a discernibly positive shift at the federal level toward legalizing cannabis, investors simply have to assume that there's only a short runway for pot stocks given the volatile nature of Washington politics. If you own marijuana stocks, you have no choice but to closely follow Sessions' and Rosenstein's commentary moving forward.

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