Friends – well, it happened (link), and now I have to revisit my 2021 predictions for the cannabis industry from last week. (link) Indeed, with the Democrats now poised to control the Senate, the likelihood of the federal government passing pro-cannabis legislation sure looks inevitable. And yet, the industry should remember that there are plenty of other legislative priorities out there (e.g., the pandemic) and the filibuster still necessitates support from Senate Republicans in order to pass any sort of cannabis laws (unless, of course, the Democrats eliminate the filibuster, but I won’t dare to opine on the likelihood of that).
In other words, it’s exciting for the industry, but nothing’s done until the President’s pen signs a bill. (link; link) For example, if cannabis is merely rescheduled, that’s not going to do much for the state-legal industry. If lawmakers decide to slow-play legalization and instead pass SAFE Banking, it’ll likely be a while before they take up further legislation to benefit the industry.
All that being said, I’m going to ignore my own advice. Here are my predictions (Version 2.0) for the cannabis industry in 2021:
- Non-Hemp Cannabis - stakeholders (not just cannabis companies) will quickly begin the lobbying push for full legalization. Legalization will gel around something akin to the STATES Act, akin to how alcohol is regulated both federally and by each state, with federal regulation being governed primarily by the Bureau of Alcohol, Tobacco, Firearms and Explosives. With the likelihood of legalization actually passing, other regulatory agencies with an interest in the outcome will also weigh in (FDA, IRS, DEA). I’ll guess that it gets enacted in Q4 2021, but that’s likely optimistic. In the interim, I think the new Attorney General makes an informal statement that essentially reaffirms the Department of Justice’s approach to cannabis in line with the Cole Memorandum’s guidance, but won’t bother with reinstating the Cole Memo.
- Hemp/CBD - the FDA still won’t issue regulations on hemp-based CBD in food/beverage/dietary supplements, but Congress will revise hemp regulations to raise minimum THC limits and solve the hot hemp extract problem.
- Capital Markets – the prospect of the inevitability of federal legalization will persuade institutional investors and lenders, as well as major financial institutions, to reconsider the potential risks of playing in cannabis (as usual, that’s not legal advice). This will result in more capital coming in from funds and non-bank lenders (but still not likely federally-chartered banks) that are new to the space, sourced by investment banks and broker-dealers who also recalculate their risk.
- I still think debt will continue to reign supreme as balance sheets grow to sustain leverage (translation – more assets mean more ability to borrow).
- MSOs will continue to tap public equity markets as valuations remain firm (they certainly enjoyed a bump when the Georgia results became clear), as public investors warm to the space, and SPACs formation will increase (link), but I don’t think that we’ll see substantial equity flooding into private companies, at least in the shorter-term, because there will be more opportunities in liquid stocks.
- Mergers & Acquisitions – still back, baby! (link) Particularly with the prospect of federal legalization, MSOs will need to accelerate their gameplans to bolster footprint and depth, making smaller MSOs (public and private) attractive targets, inevitably boosting valuations.
- Interstate Commerce – no one will challenge interstate commerce laws in court, because it won’t be worth the expense of the legal fight if federal legalization is nigh – the unconstitutionality of interstate (discussed link) will be even easier to address when cannabis is legal.
- Miscellaneous – I’m even more convinced a major US beverage or beverage distribution company, or a multinational consumer products company, will take the risk of making a direct investment in a plant-touching business, based on the same risk-reward calculation discussed above. I’ll see many of you at MJBizCon in Vegas in December 2021. I’ll still try to expand my references in these Musings beyond knishes and theoretical physics.