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The Tide Is Turning: Investing Around The Schumer Cannabis Reform Bill

What to watch for as Congress works to get it over the finish line.

This story originally appeared on Benzinga

After Democrats swept control of the White House, the House of Representatives and the US Senate in January of 2021, cannabis stocks soared into the new year on the hopes of major legislative policy reform advances including the prospect of federal legalization.

While waiting for this legislation cannabis markets have consequently fallen from their January 2021 highs, despite plenty of commentary by Democrats their cannabis agenda was coming fast.   

RELATED: The Problem with the Cannabis Reform Bill

Does the reform bill go far enough?

On July 14, after rumored releases each of the last two months, Majority Leader Schumer unveiled the much-anticipated discussion draft of the comprehensive cannabis reform bill that he and Senator Wyden and Senator Booker have been working on since January. While the proposed bill contains sweeping reforms that are long overdue, the prospects of the bill garnering the support of 10 Republicans in the Senate is slim, and based upon previous statements from some Democrat Senators obtaining all 50 votes from that caucus may be a bridge too far as well. 

Schumer and his colleagues have presented a wish list of legislation for the industry that while important over the course of time for the growth of the sector and the social restitution that should accompany it, is not realistic or necessary at this time. 

The Bill contains sweeping reforms including:

a) descheduling cannabis from schedule 1,

b) offers expungements for those with cannabis convictions,

c) funds social equity programs via cannabis excise taxes,

d) cedes regulatory control of cannabis to the FDA, ATF and TTB from the DEA, and

e)  maintains state based regulatory frameworks (which seemingly contradicts item (d) above), among other initiatives. The Bill does not expressly tackle needed banking and financial reforms, tax and 280e reforms, and/or how to harmonize state and federal regulation of cannabis, which will be key items to watch for as comments pour in from stakeholders and negotiations begin. 

A first step

Clearly, Democrats are well positioned to deliver the first step towards historic and long overdue cannabis policy reform, yet to date it’s been more conversation and less action in the halls of Congress. Schumer’s Bill doesn’t leave Republican lawmakers a lot of room for compromise that they can get comfortable with.  

We take the view that Schumer has the ability to cut right to important issues that take a pragmatic approach to passing legislation now that can be passed, and that this legislation will be a stepping stone to more broader, sweeping reform he has proposed.

Even Supreme Court Justice Clarence Thomas, who is regarded as one of the most conservative Justices on the Court, recently threw his hat into the ring on cannabis reform when he opined in a recent opinion that “the Federal Governments current approach is a half in, half out regime that simultaneously tolerates and forbids local use of marijuana. This contradictory and unstable state of affairs strains basic principles of federalism and conceals traps for the unwary.”  

RELATED: This Is What You Need to Know About Cannabis Banking Laws in 2021

Banking and taxation issues still need addressed

Now, it’s time for Congress and more specifically the Senate to address banking and taxation issues that can allow the industry to be built on a more solid foundation and afford minority/social equity applicants access to affordable capital while we tackle the bigger federal issues and social issues over the longer term.   

Although the SAFE Banking Act passed through Congress last month (with over 100 Republicans voting in favor of allowing cannabis companies access to the federal banking system), Senate Majority Leader Chuck Schumer expressed reservations about the legislation and how it could undermine his own proposed cannabis bill that will seek broader reforms including long overdue social justice measures. 

While we agree that SAFE does not go far enough in remediating our country’s ill fated “war on drugs,” it would be the first major win for cannabis reform in Congress,and winning begets winning. Social justice must be critical component of the broader reform legislation, but the reality of policy making in Washington DC, is that its a game of incrementalism, and in some cases pragmatism that is best summarized by the motto of the late Jim Valvano during the miracle run by NC State Wolfpack in the NCAA tournament, namely “survive and advance.”

If we truly want to empower minorities and those that have been negatively affected by this misguided war on drugs, the industry needs to first have proper access to capital and real banking services. If the leading US cannabis companies cannot access traditional commercial and investment banking, while also facing punitive tax code, minority small business owners will no chance to succeed    

Putting some points on the board

The SAFE Banking Act is a rare piece of bipartisan legislation supported by Republicans, Democrats, and the cannabis industry at-large. In last month’s House vote, 15 more Republicans voted in favor of the bill than in 2019 (when the SAFE Act was first introduced only to be derailed by the coronavirus pandemic). 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.

Since the SAFE Act was first passed, seven states have legalized adult-use cannabis. A bi-partisan group of 34 U.S. Senators have signed on to sponsor or co-sponsor the SAFE Act, and the bill has the public support of the American Bankers Association and a bipartisan group of Governors and State Attorney Generals. 

Passage of the SAFE Banking legislation would mark the first time that Congress passed cannabis reform legislation, while simultaneously serving as a springboard for the members of both chambers to collaboratively tackle reasonable and workable social justice, social equity and legalization policies. Immediate benefits of this legislation would include allowing the government the ability to accurately assess the size of this market and the tax dollars to flow from it (even the head of the IRS has stated he wants the money in banks for regulatory purposes).

Taxation at the federal level would unofficially transition the federal government’s treatment on cannabis from legal enforcement to revenue generation, and the potential tax revenue that could be generated from the cannabis sector could be used to assist in the funding of other key Democratic initiatives such as the infrastructure bill that is currently being finalized.  

What investors need to watch

Thankfully, Majority Leader Schumer has made cannabis a priority and the release of his comprehensive proposal is an exciting day for the industry and investors alike. But to get it over the finish line, Democrats need a two-step approach: Pass the SAFE Banking Act first and take the historic first win, while simultaneously crafting and building bi-partisan support for a broader reform bill. The former is what will make the latter, including the Senate Majority Leader’s more involved bill, a reality.  

Meanwhile, cannabis investors no longer are pricing in near term federal banking access and cannabis stocks have pulled back 20-30% from the mid-February highs. While investors are right to focus on the long term growth fundamentals, getting in ahead of the wall of capital that will follow federal banking reform should also prove almost as historic as the broader cannabis legalization movement.