Despite a year of major highs and lows in 2023, cannabis investors are hopeful that this year will be better thanks to several major issues that are likely to boost the cannabis industry. Let’s take a look at five themes likely to shape the industry:
Last year, U.S. marijuana businesses witnessed substantial gains after the U.S. Department of Health and Human Services (HHS) recommended the rescheduling of cannabis from Schedule I to III of the Controlled Substances Act (CSA). If rescheduling materializes, it could alleviate the burdens imposed by Section 280E of the IRS, allowing marijuana companies to obtain tax credits and standard business tax deductions similar to mainstream businesses.
Despite the potential benefits, the timeline for rescheduling remains uncertain as experts anticipate a proposed rule by the U.S. Drug Enforcement Administration (DEA), followed by potential legal challenges.
Advancements in cannabis banking legislation
In 2023, the Senate banking committee endorsed the SAFER banking measure with a bipartisan vote of 14 to 9. This act seeks to enable financial institutions to offer crucial banking services to state-regulated cannabis entities without the fear of federal repercussions.
The bill also introduces updates directing financial institutions to cultivate local banking relationships and expand Federal Deposit Insurance Corp. surveys to smaller businesses. The bill has passed the House seven times but has failed in the Senate.
The focus is currently on section 10 of the act, which aims to prevent regulators from displaying favoritism towards specific industries. Strengthening section 10 language could enhance the bill’s chances of gaining approval from conservative House leadership.
The marijuana industry’s stock market performance is likely to remain sensitive to regulatory changes, potentially leading to either positive or negative market swings. With uncertainties surrounding rescheduling and the banking legislation, industry players should brace for ongoing equity sensitivity.
Regulatory shifts could profoundly impact business strategies and investment decisions, and thus stakeholders ought to stay agile in response to these changes.
Additionally, despite potential equity dilution from balance-sheet recapitalization, investors stand to benefit from better financial status among marijuana businesses.
Further stabilization with limited capital formation
The industry is expected to witness continued price stability, fostering a more predictable pricing ecosystem for consumers and businesses. However, states facing diminishing capacity may see pricing power return to marijuana operators.
This year, the influx of new capital into the sector is anticipated to be limited. Even if the DEA agrees to reschedule cannabis, institutional investors are likely to wait for a finalized rule before injecting new capital into the space. This sets the stage for potential investments in companies with proven operational capabilities and scale advantages.
Unlikely mergers and acquisitions
The year 2023 saw subdued activity in marijuana mergers and acquisitions, and this trend is expected to persist in 2024. Last year, companies dedicated their efforts to enhancing cash flow and extending debt, making them less inclined to assume additional debt or divert attention to M&A integration this year.
If the DEA approves rescheduling, most companies will leverage section 280E relief to strengthen their balance sheets rather than engage in a spree of mergers and acquisitions. However, there may be opportunities for smaller-scale mergers and acquisitions, where businesses capitalize on improved financial conditions and potentially high equity valuations for modest, strategic acquisitions.
Existing players such as Canopy Growth Corp. (NASDAQ: CGC) (TSX: WEED) are likely to keep a close eye on regulatory developments at the federal level in the United States as these could shape their future plans and operations.
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