Coming Soon to Nevada: Pot Lounges?

Few industries have had investors seeing green over the past year like legal marijuana. According to a recently released report by Marijuana Business Daily entitled "Marijuana Business Factbook 2017," the legal weed market in the U.S. could grow by about 30% in 2017 and by a cumulative 300% between 2016 and 2021 to more than $17 billion. These growth figures are more than enough incentive to drive investors to grab a pot stock or three for their portfolios.

These growth figures have also been backed by a notable shift in consumer opinion toward legalizing pot. In 1995, the year before California legalized medicinal cannabis for compassionate use, just 25% of those surveyed by Gallup wanted to see it legalized for adult use across the United States. But by October 2016, approval for the idea of a national legalization had spiked to 60%, an all-time high.

The U.S. federal government makes its presence known

At the other end the spectrum, the U.S. federal government continues to make life challenging for the industry and marijuana stocks in general. A Schedule I categorization for cannabis means it has no recognized medical benefits, placing it on par with heroin and LSD. This scheduling means that weed-based companies are unable to take corporate income tax deductions like normal businesses, nor are they often able to secure basic financial services like a checking account or line of credit. It's also exceptionally difficult for research companies to secure cannabis in order to run risk-versus-benefit studies that have the potential to alter marijuana's scheduling.

These inherent disadvantages for the legal weed industry put its companies in quite the bind. They're often stuck dealing with cash, which comes with growth restraints, and they're being forced to pay tax on their gross profits rather than their net profits, leaving less cash left over. That means less in the way of growth opportunities and hiring.

Because marijuana is an illegal substance at the federal level, the pot industry also faces challenges within legal states. Individual jurisdictions usually have the right to dictate whether a dispensary is allowed to open within a city or county. The result, as we've witnessed in Colorado, can be something of a Swiss-cheese-like legalization effort, where weed is unwelcome in more jurisdictions than welcome.

Nevada aims to be a cannabis trailblazer

However, Nevada is hoping to be a trailblazer of sorts on the marijuana front and turn this latter disadvantage on its head. The Silver State, which only voted to legalize recreational weed in the November 2016 elections, and began selling the product to adults ages 21 and up this past July, is tinkering with the idea of becoming the first state to legally allow pot lounges where consumers can smoke cannabis products in a public place. Colorado, Washington, Oregon, and Alaska only allow cannabis to be smoked in the privacy of one's residence, while California, Maine, and Massachusetts, the three other recreational marijuana states, have yet to begin selling adult-use weed.

According to a report from The Hill, Nevada's Legislative Counsel Bureau noted last week that its state law does not prohibit city or county governments from operating lounges where consumers can use marijuana. Considering how popular Nevada and more specifically Las Vegas are for tourists, the addition of marijuana lounges or cafes could dramatically boost tourism to the state.

For instance, a late 2015 study commissioned by the Colorado Tourism Office found that marijuana played a big role in boosting tourism to the state. The survey revealed that of those folks planning to visit during the summertime and who had also seen the state's "Come to Life" ad campaign, practically half (49%) were specifically influenced by the fact that recreational marijuana was legal. Nevada is aiming to have a similar effect on tourism in the state.

As you can probably surmise, though, not every lawmaker in Nevada is on board with the idea, including Gov. Brian Sandoval (R-Nev.) who noted, "I did not support them [pot lounges] previously. I don't support them now." Kevin Sabet, the head of anti-legalization movement group Smart Approaches to Marijuana, worries that pot lounges will lead to higher crime rates and not be a good thing for the state.

Pardon the pun, but there's still a lot to be hashed out with pot-lounge discussions still in the early stages.

Here's a bigger worry for Nevada and marijuana stocks

Of course, Nevada may have a bit more to be concerned with than just whether it can regulate pot lounges. There's the possibility that the federal government could step up regulatory enforcement in the months to come.

In February, now-former White House press secretary Sean Spicer suggested that the Trump administration would take a tougher stance on federal regulatory enforcement of cannabis than the Obama administration. While he failed to outline the specifics of what that added enforcement might entail, it's had the industry on edge ever since.

Making matters worse, Attorney General Jeff Sessions appears to be itching to wage war on medical marijuana businesses. The man in charge of the Justice Department sent a letter to congressional leaders in May requesting that they repeal the legislation protecting marijuana businesses operating in legal states from federal prosecution. Sessions has made it abundantly clear in previous speeches and Senate hearings that he doesn't care for marijuana one iota, and that he'll stop at nothing to halt or reverse its expansion.

It's also worth noting that Republicans are just one of two groups remaining to still have a negative view of cannabis (senior citizens being the other). With Republicans in control of the legislative branches of government, it's certainly not out of the question that we see a crackdown of sorts on the industry.

By the looks of things, the U.S. marijuana industry could have a very challenging year ahead, which serves as a warning to all weed-based companies and marijuana stock investors.

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