House Majority Leader Chuck Schumer (D) just made good on one of the most ambitious goals of his career.
On Wednesday, Schumer released draft legislation of The Cannabis Administration and Opportunity Act, a cannabis bill that would legalize cannabis at the federal level.
On the surface, this sounds like a watershed moment for the U.S. cannabis industry. Federal legalization would unleash the true potential of the U.S. cannabis industry. It would generate billions in new economic activity. It would also create thousands of new jobs and generate billions in taxes for state and local governments.
However, U.S. cannabis stocks fell sharply on the news.
The Advisor Shares US Cannabis ETF (MSOS) was down 3.5%, one of its worst days in the last few months.
Why would we see a significant drop after what seems like awesome news? This bill is a long shot to pass and Wall Street knows it.
Here are some more details from Politico.
Public opinion suggests there’s widespread bipartisan support for liberalizing cannabis laws, but that shift hasn’t translated to the Senate: Schumer has several reluctant members within his own caucus and will have to scrounge up at least 10 Republican votes for the legislation during an already chaotic Senate calendar filled with Biden administration priorities on infrastructure, police accountability and education. Schumer would also need to corner President Joe Biden — who has supported decriminalizing marijuana but not legalizing it — to sign the bill. Still, he’s projected confidence about his odds in the past.
Unfortunately, this cannabis bill looks dead on arrival, and that’s why the cannabis sector fell.
However, this drop is creating a big opportunity. I still see a high probability of cannabis reform this year with The Secure and Fair Enforcement (SAFE) Banking Act.
The Industry’s 3 Big Problems
The SAFE Act would technically fall short of federal legalization. But it would fix three of the U.S. cannabis industry’s biggest financial problems.
#1 – Cannabis Companies Would Gain Enormous Tax Benefits
The IRS code known as 280E prevents cannabis companies from taking federal tax deductions available to other industries. This forces cannabis companies to pay significantly higher tax rates than other industries. The SAFE Act would offer the cannabis industry the same tax deductions as other industries and that would have a significant impact on financial performance.
#2 – Cannabis Companies Would Gain Access to Banking Services
Federally-backed banks such as Bank of America (BAC) and JP Morgan Chase (JPM) are currently banned from offering services to the cannabis industry. This has been a huge drag on the cannabis industry. Many small businesses are forced to operate in cash with no access to basic banking services. Once again the SAFE Act would give the cannabis industry access to the same banking services as other industries.
#3 – Cannabis Stocks Would Uplist from Junior Exchanges to Full Exchanges
U.S. cannabis stocks are currently banned from trading on the New York Stock Exchange and NASDAQ. That’s why U.S. cannabis stocks are mostly listed on the Canadian Stock Exchange and the U.S. over-the-counter (OTC) markets. The Safe Act would enable U.S. cannabis stocks to uplist to the major U.S. exchanges. This move would usher in millions of new investors into these stocks.
The SAFE Act isn’t long-shot legislation. This bill has already made serious progress in Congress.
The SAFE Act was introduced by Colorado Democrat Ed Perlmutter back in 2019. The SAFE Act has passed in the Democrat-controlled House four times, most recently in April of 2021.
Looking forward, I still see a strong probability this bill can clear the Senate in 2021. Here are some more details from JD Supra.
The bill was approved on a significantly bipartisan basis as 106 Republicans (approximately 50 percent of the caucus) joined 215 Democrats in favor. In 2019, a similar version of the legislation passed the House of Representatives by a vote of 321-103, including 91 Republicans in favor (only 46 percent of the caucus). The significant increase in Republican support coincides with the growing trend of legalization of medicinal and adult-use cannabis products at the state level over the last two years.
If the SAFE Act does pass, it would be an enormous victory for the U.S. cannabis industry. We expect cannabis stocks to spike higher on the news.
Risks to Consider
U.S. Senator Corey Booker (NJ), a co-sponsor of The Cannabis Administration and Opportunity Act with Schumer, has vowed to block any cannabis legislation that does not include full federal legalization.
The Big Picture
House Majority Leader Chuck Schumer’s new cannabis bill looks dead on arrival, causing cannabis stocks to fall in the last few days.
However, I still see a high probability of cannabis reform with the SAFE Act. If the SAFE Act passes it would create enormous financial benefits for the U.S. cannabis industry and would be a strong catalyst for U.S. cannabis stocks.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.