Who Will be the Winners and Losers When Federal Cannabis Prohibition Ends?

The pioneers who braved federal threats to create the legal cannabis market are least likely to benefit commercially when prohibition eventually ends.
Who Will be the Winners and Losers When Federal Cannabis Prohibition Ends?
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Magazine Contributor
Attorney at Law
6 min read

This story appears in the May 2019 issue of Green Entrepreneur. Subscribe »

Is it time to break out the cannabis-infused bubbly?

Many analysts are predicting not whether but when cannabis will become federally legal for adult use in the United States, as it has in countries like Canada and Uruguay -- with others such as Mexico likely soon to follow. It may come in the form of the government removing cannabis as a scheduled drug under the Controlled Substances Act (CSA). It may come in the form of the pending STATES Act or through other congressional action. It may even come through the courts -- for example, with the current constitutional challenge to the CSA as it applies to cannabis. An initial dismissal was recently argued on appeal. 

Let us step back, however, to consider how we got here. Before 1937, when cannabis was first criminalized in the U.S., the plant was prescribed for many ailments in this country. What happened?

Related: What Is Schedule I and Why Is Marijuana on the List, Anyway?

First, Mexican immigration in the early 1900s took lower-paying jobs away from Americans, sowing racist anger that was given voice by newspaper publisher William Randolph Hearst. With his timber interests threatened by hemp, Hearst published scathing articles about the immigrants and the evil marijuana they brought with them. Then in 1930, Harry J. Anslinger, a man who was infamous in his hatred of cannabis, became head of the Federal Bureau of Narcotics and stayed there until 1962. One of his tamer quotes: “By the tons it is coming into this country -- the deadly, dreadful poison that racks and tears not only the body, but the very heart and soul of every human being who once becomes a slave to it in any of its cruel and devastating forms…Marihuana is a shortcut to the insane asylum. Smoke marihuana cigarettes for a month and what was once your brain will be nothing but a storehouse of horrid specters. Hasheesh makes a murderer who kills for the love of killing out of the mildest-mannered man who ever laughed at the idea that any habit could ever get him.”

Related: Steep Taxes on Recreational Marijuana Are a Powerful Incentive for States to Legalize

Despite the fact that there was zero scientific evidence backing up any of Anslinger’s claims, Congress outlawed cannabis in the 1930s. That lasted until 1965, when activist Timothy Leary was arrested for marijuana possession. Leary fought back in the courts, and in 1969 the Supreme Court overturned the 1930s criminalization as unconstitutional. But by then the Nixon administration was starting to worry about the 1972 election and made drugs an issue. In a surprisingly honest interview, Nixon’s domestic policy chief, John Ehrlichman, who was eventually jailed for his role in the Watergate scandal, said this: “The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or [be] black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities…We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did.” 

That kind of lying led to Congress’s passing -- and Nixon signing -- the CSA in 1970. Once again cannabis was criminalized and, this time, declared to be in the same category of danger as heroin and LSD. Those of us of a certain age remember the brainwashing that took place in schools: Cannabis makes you crazy. It makes you commit crimes. It is a clear gateway to more serious drugs. 

Of course, today, as more and more states are legalizing and the cannabis industry is taking off, we are at last breaking down the stigmas and realizing that all that fear mongering was based on racism, profit, and politics; not science. And so now, it’s time to look ahead to the next chapter. With federal legalization near, how will the new market shake out? 

Who Wins?

 Big alcohol, pharma, beverage, and tobacco. The giant “sin” companies and other operators already realize that they would rather join than fight and have been investing heavily in cannabis in legal countries, particularly Canada. 

Big multistate cannabis operators. Companies that have been quickly building to be as large as possible likely will sell to the giant multinationals, who may be suddenly more open to associating with U.S. operators. 

Farmers. Growing cannabis and hemp is generally profitable compared with other crops. Hemp is environmentally benign and good for the soil. In addition, having a national, or even potentially international, market, as opposed to a state-limited one, will enhance potential sales.

Investors and larger companies. Until now public U.S. cannabis companies have been prevented (with one exception) from listings on national exchanges such as the Nasdaq and the NYSE. With legalization, these companies, a number of which have market values well in excess of $100 million, would see the benefits of trading on the larger exchanges.

Tax coffers. Legal cannabis means tax revenue. It is expected that, much like with cigarettes, the federal government will, upon legalization, impose taxes on top of those already being charged by states that have legalized cannabis.

Who Loses? 

Drug traffickers. It is estimated that in 2017 about 40 percent of drug trafficking arrests were related to cannabis. Legalization is hoped to significantly erode this illegal market.

Smaller operators. Craft brands may emerge, much as with alcohol, but those with a single dispensary or grow facility will likely be challenged by the economies of scale and marketing muscle larger operators and brands will enjoy. The scenario could be similar to when the big-box hardware stores like Lowe’s entered the market and crushed most of the decades-old local hardware shops.

Social media and content sites. A number of cannabis-focused sites likely will find stiff competition from larger similar sites that until now have eschewed cannabis content and advertising. When companies such as Yelp, Facebook, news outlets, and others enter the space, they will challenge these operators (or possibly acquire them).

Related: Is Big Pharma for or Against Legalizing Medical Marijuana? Maybe Both.

Opioid manufacturers. Studies are beginning to confirm that cannabis use can help folks reduce or eliminate the use of highly addictive opioids for pain. This is one reason the pharma companies are planning big investments in cannabis to get ahead of this challenge.

Service providers. Many law, accounting, and consulting firms have come out of the closet in recent years to start representing U.S. cannabis companies. Most of their competitors have stayed away until now. Once they enter (as they have already begun to do with legal Canadian operators), those who took the risk early on will face much stiffer competition.

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