Democrats Create the Perfect Swell as a Green Wave Approaches

Ending with the conclusion of the Georgia Senate runoff elections on January 5th and resulting in control of the White House and both chambers of Congress, a Democratic election trifecta has created optimism within the cannabis industry for federal reform, with investors eager to capitalize on this momentum. (John Rebchook, Marijuana Business Daily). In wake of the Democrats taking control of the Senate, the market is investing in the improved probability for the federal legalization of cannabis, the end goal of a long journey that formally began in 2012. Id.

Colorado was the first state to legalize marijuana in 2012 with Amendment 64, creating a domino effect in which many states followed suit. (Kelly Anne Smith, Forbes). Today, marijuana is legal in 15 states, with Arizona, New Jersey, South Dakota, Mississippi, Montana, and Vermont approving both medicinal and recreational use in 2020. (Jeremy Berke et al., Business Insider; Kelly Smith, Forbes). On December 4, 2020, House Democrats attempted to pass a historic piece of cannabis reform legislation, the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (“MORE Act”), which would federally legalize cannabis. (Jeremy Berke et al., Business Insider). However, the legislation was considered a nonstarter for the Republican-led Senate and was never passed. Id. As a result of the Democratic victories in the Presidential election and the Georgia senate runoff elections, House leadership intends to re-introduce the MORE Act. (JD Supra). Senate Majority Leader Chuck Schumer has already indicated that the Act will be a priority in the Senate going forward. Id. The push for federal reform has received support from the Executive Branch, as President Biden has stated that he would support federal decriminalization of cannabis. Additionally, Vice President Kamala Harris already sponsored a previous version of the MORE Act in the Senate. (Jeremy Berke et al., Business Insider). The Democratic-controlled government’s heavy focus on nationwide legalization warrants investors’ optimism for a green wave. (Lizzy Gurdus, CNBC).

With the looming possibility of favorable, cannabis-related legislation, investors are anticipating a massive influx of capital into the sector, justifying investors’ bullish feelings towards the future of the cannabis industry. (Lizzy Gurdus, CNBC; Omar Sacirbey, Marijuana Business Daily). The Democratic sweep of the White House and both chambers of Congress has created anticipation for the liberalization of banking laws for cannabis companies, improvements that, in conjunction with national legalization, “would open the door for [cannabis] companies to be traded on the New York Stock Exchange and the Nasdaq.” (John Rebchook, Marijuana Business Daily). This would act as a force multiplier for the entire cannabis industry, allowing the major industry players to raise exponentially more capital through initial public offerings and subsequent mergers and acquisitions. Id. As a result, big institutional investors would be increasingly willing to provide capital to these cannabis companies with little fear of facing penalties as they did during the recent two-year funding shortage. Id. Cannabis companies would no longer be solely dependent on wealthy individuals and family offices for financing, giving cannabis companies more flexibility to grow and operate. Id.

Additionally, the cannabis industry may begin to take advantage of tax benefits that conventional companies already do. Id. There is a growing belief in the industry that tax laws will be liberalized through an amendment to Section 280E of the tax code, allowing cannabis companies to depreciate equipment and property and claim additional tax write-offs. Id. This long-awaited tax reform would give cannabis companies the flexibility to expand their multi-state operations, breathe life into small cannabis entities that are unable to fully capitalize on the changing industry banking laws, and instill investors’ confidence in the market. (John Rebchook, Marijuana Business Daily; John Schroyer, Marijuana Business Daily). While the growing cannabis industry will need to be wary of increased regulatory pressure from the Securities Exchange Commission and other federal agencies, there is no denying that the industry has a bright future. (John Rebchook, Marijuana Business Daily; Omar Sacirbey, Marijuana Business Daily). That future is currently unfolding for many, as North American cannabis companies have closed a record-breaking $1.6 billion in capital raises in January, with large cannabis companies, such as Curaleaf Holdings, Village Farms International, and TerrAscend, closing deals upwards up $150 million. (John Rebchook, Marijuana Business Daily).

The nationwide legalization of cannabis, a probable outcome after the Democratic election trifecta, will have positive, cascading effects on both state and federal economies. (Karmen Hanson, National Conference of State Legislatures). Nationwide legalization of cannabis would drastically increase tax revenue, as evidenced by Colorado’s successful legalization structure. (Colorado Department of Revenue). In 2019, Colorado collected more than $302 million in taxes and fees on both medicinal and recreational marijuana. Id. In 2020 however, Colorado collected more than $387 million in marijuana tax revenue from a record-breaking $2 billion in total marijuana sales. (Robert Davis, The Center Square). If the new administration’s plan for nationwide legalization comes to fruition, states will see dramatic increases in their state tax revenues that could generate up to billions of dollars in federal tax revenue, a huge boost for an economy still recovering from the coronavirus pandemic. (Christy Bieber, The Motley Fool). The economy would get another boost from the massive number of jobs that federal legalization of cannabis would create, especially given that a record number of Americans are filing for first-time unemployment benefits. (Jeff Cox, CNBC). Passage of legislation legalizing cannabis could generate thousands of jobs, as the cannabis industry added over 77,000 jobs in 2020, one of the worst years for economic growth in American history. (Bruce Barcott et al., Leafly). However, this approximation may be a significant underestimate, as there are support industries, such as software developers, financing services, and construction companies, that may benefit from the passage of favorable cannabis-related legislation. (Angela Dills et al., Cato Institute).

The substantial economic effects of federal legalization of cannabis only fuels the optimism that investors are feeling regarding the cannabis industry. While the cannabis industry has long been deprived of the benefits that mainstream companies enjoy, the swing of power in favor of the Democratic party has signaled the emergence of a green wave with investors eager to drop in and capitalize on the new investment landscape.