Like any young industry, cannabis companies need to raise capital in order to finance future growth. Due to their precarious legal status, cannabis companies do not enjoy the access to banking services that many other companies enjoy. This makes raising capital harder and increases its cost. Low interest rates, however, have made those costs relatively cheaper in recent years. That's about to change. The industry may face increasing challenges in 2022 after the Federal Reserve signaled this month that it plans to raise interest rates three times by the end of next year.
Another issue is banking. Congress has yet to lift banking restrictions on cannabis companies, which has limited their access to capital. The Secure and Fair Enforcement (“SAFE”) Banking Act, would prohibit federal regulators from penalizing financial institutions for the providing services to state-legal marijuana-related businesses. It has passed the House five times but never made it through the Senate.
The COVID-19 pandemic is affecting how many people use cannabis for medical uses, and how much. That's because the pandemic has taken its toll on people's mental health globally. There were 53.2 million additional major cases of depressive disorder and 76.2 million additional cases of anxiety disorders globally due to the pandemic in 2020, according to a study by The Lancet in October 2021. It's no surprise, then, that a study published in the Journal of Addictive Diseases in September 2020 indicated rising use of medicinal cannabis. Specifically, the study found that people with mental health conditions increased their use of medicinal cannabis by 91% since COVID-19 was declared a pandemic on March 11, 2020. The emergence in November 2021 of Omicron, a new variant of the coronavirus, could keep marijuana use at high levels among mental health patients.
As the legal cannabis industry continues to mature, more established companies outside of the industry are expanding their foothold. The so-called “addiction” industries—alcohol, tobacco, and pharmaceuticals—have been heavily investing in the cannabis market. They have been acquiring many companies with the intent of selling cannabis en masse as they do their own products. This trend could dramatically transform the cannabis industry.
Rising Interest Rates
To be sure, the pandemic hasn't boosted use on every front. A study led by researchers at the University of Michigan focused on adolescent drug and alcohol use. The study found that marijuana use among adolescents has not changed significantly during the pandemic, though the study also noted a record decline in the perceived availability of marijuana.
Investors should watch out for news about the SAFE Banking Act and the STATES Act, both of which could have a dramatic impact on the ability of U.S. cannabis companies to grow and thrive.
The cannabis industry has grown dramatically in size in recent years in response to expanding legalization and a flood of capital from venture capital firms and other investors. The industry broke new ground last year as New Jersey, Montana, South Dakota and other states and jurisdictions voted to legalize the recreational use of cannabis. This year, New York, Virginia, New Mexico, and Connecticut were added to the list of states legalizing recreational use.
The U.S. Market
Lobbying for federal legalization of marijuana picked up earlier this year. Banks, tobacco and alcohol companies, and other corporations have joined union advocates, personal-use supporters, and social-justice activists in pushing for federal legalization.
In July 2021, three U.S. Democratic senators—Senate Majority Leader Chuck Schumer, Finance Committee Chairman Ron Wyden, and New Jersey Senator Cory Booker—unveiled a discussion draft of a bill that seeks to legalize cannabis at the federal level. The draft bill, known as the Cannabis Administration and Opportunity Act, would allow adults to buy and possess up to 10 ounces of marijuana without facing criminal penalties. The bill also would eradicate non-violent marijuana crimes, advance medical research, and allow cannabis companies access to basic financial services, including bank accounts and loans.
Adrian: Hey, hey. Thanks so much. You have a good one.
Jeremy: They can’t take credit cards, because it’s federally illegal. They’re doing business mostly all in cash.
Will: These are even turning purple. So that’s one indicator that the plant is quote-unquote “finishing up.”
Narrator: In each new state it enters, Wana also has to follow different manufacturing and packaging laws. For one, the THC symbols stamped on the gummies come in all forms.
Jeremy: And oftentimes that correlate with being white.
Jeremy: Because it’s just not really cool anymore, right? Like, their mom is buying it. 93% of Americans polled say at least medical marijuana should be legal. So with any hot-button issue with that much public support, it’s only a matter of time. I think there will be a lot of push and pull that will likely take us probably through the end of Biden’s term, if I had to kind of put a timeline on it.
Narrator: And it all starts with the business license, the first barrier to the marijuana industry. Will and Adriana wanted to start a farm in California. But there, a license to grow can cost almost $80,000, with an $8,000 application fee. That’s a lot more than a liquor license in California, which can cost just over $15,000 max.