Following peak investor excitement in 2018 and early 2019, the cannabis markets in Canada and the U.S. have seen a major shift. After its initial uptake, both Canadian and U.S. cannabis markets are now seeing a slow downturn.
The Canadian Cannabis Landscape
In Canada, legal retailers face immense competition from a rampant illegal market. These illegal operations are not subject to the restrictions and regulations imposed on legal retailers, thereby dominating the market with a more competitively priced, readily available product. This has made the costs of investing in a legal cannabis enterprise tenuous. In contrast, the U.S. has suffered from an oversupply and a lack of regulation, which has driven down prices.
Some cannabis companies are struggling to compete, which has primed the market for an increase in mergers and acquisitions. However, the unpredictability of the cannabis market poses a challenge to valuing these companies. At the start of legalization, the cannabis market soared on the promise of future growth, but provincial and federal regulations limited the number of retail stores that could open and the supply of products, which resulted in a downward trend in valuations.
As more companies consolidate their operations with larger players in the industry, the market could see an upturn in prices, providing a positive signal to investors.
How the U.S. SAFE Banking Act Will Affect Cannabis Markets
With the recent reintroduction of the Secure and Fair Enforcement Banking Act (the “SAFE Banking Act”) in the U.S. House of Representatives and the Senate, there is hope that future expansions into the U.S. market may be possible for Canadian companies. The SAFE Banking Act proposes offering safe harbor to financial institutions like banks and insurance companies who provide services to cannabis businesses from federal prosecution. Currently, American cannabis companies are working in a peculiar situation where they are fully compliant with state laws, but are at odds with federal legislation. Financial institutions require federal payment systems to operate and are under the purview of federal authority. Since cannabis is illegal at the federal level, financial institutions are unwilling to become involved with business operations that are offside federal legislation.
The protections afforded by the SAFE Banking Act are an integral component to enabling Canadian cannabis companies looking to expand to the U.S., as well as smaller U.S. cannabis operations obtaining small business loans. Due to the inability to work with financial institutions many of these smaller U.S. cannabis companies operate on a cash basis, which increases risks and limits their ability to expand and grow. The hope is that with the formal introduction of the SAFE Banking Act, financial institutions will be able to meet community needs, reduce cash motivated crimes, and make tax collection more efficient, and allow the industry to grow and develop further.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.