Just like that, 2022 is behind us and a new year is here! While the capital markets have certainly been tight, we’ve seen this as an opportunity to deploy capital with valuations at historic lows. Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”
In addition to continued regulatory momentum this year, our focus on structuring, valuation, downside protection and balance sheet optimization is gearing 2023 up to be one of the best vintages for deployment we have seen.
2023 Cannabis Legislative Outlook
The KEY team believes that the cannabis industry’s total addressable market (TAM) will continue to expand significantly due to continued state by state expansion and legalization efforts. We believe that the main drivers of this expansion will be grassroots state legalization of cannabis and President Biden following through on campaign promises related to the industry, such as rescheduling of cannabis in 2023. While we would have liked to have seen SAFE pass during this lame duck session, we still believe that continued progress towards meaningful cannabis reform is likely in the near future, including a 2023 Farm bill, new medical marijuana research and banking reform.
In case you missed it, KEY’s latest white paper “Cannabis 2.0: Investing in Today’s Regulated Industry” is available for download here:
As we enter the new year, potential movement on several legislative issues will impact cannabis investment decisions in 2023. At KEY Investment Partners, we will be watching the following closely to determine how:
Potential for rescheduling cannabis
Politics and the always-laborious process of passing legislation have stymied efforts to legalize cannabis at the federal level. However, the question of descheduling or rescheduling cannabis from its current Schedule I status to a less-restrictive category has become an increasingly interesting option – and there do exist codes under U.S. law that would allow for this change outside of an act of Congress. Descheduling would essentially legalize cannabis like alcohol, but it is more likely that cannabis could be rescheduled to treat cannabis more like a prescription drug. This would open opportunities for research and progress for identifying medicinal purposes for cannabis. We think this is the more likely scenario should action be taken on these steps by the Department of Health and Human Services. Toward the end of 2022, President Biden ordered a haste review of cannabis scheduling. We are excited and hopeful that this will result in real progress in 2023.
SAFE Banking as a bipartisan standalone bill
There appears to be bipartisan support to pass SAFE Banking in both the U.S. House of Representatives and the Senate. However, that bipartisan support was not enough to bring the legislation to a vote as an amendment to the National Defense Authorization Act (NDAA) late last year as was widely anticipated by supporters. The challenge for Congress to pass the bill, it seems, is to have a straightforward up–or-down vote on SAFE Banking as a single, standalone bill. We believe this is the only way SAFE will make it through the Congress. There is certainly the desire to do it on both sides of the aisle. We are hopeful SAFE Banking will pass in 2023.
Hemp industry should closely watch the reauthorization of the Farm Bill
The U.S. Farm Bill is a package of legislation that has a tremendous impact on agriculture livelihoods, how food and other crops are grown and how agriculture products are regulated. The law is updated and reauthorized every five years, and is scheduled for reauthorization in 2023. The reauthorization can have widespread impact on hemp growers and the CBD industry, as evidenced by the decision in the last 2019 Farm Bill to remove hemp from the definition of marijuana in the Controlled Substances Act. Industry watchers will be paying close attention to any changes in the legislation. Any changes that occur could have a significant, positive impact on CBD in broader nutraceuticals. This may set the stage nicely for further success with some of our portfolio companies including Open Book Extracts, Katalys and Front Range Biosciences.
KEY In The News
It’s Finally Time to Invest in Cannabis
Nanalyze recently covered KEY’s Cannabis 2.0 white paper. Outside of reviewing our insights they summarize some of our higher level concepts.
Cannabis investment firm Key Investment Partners (KEY) has suggested that the time to invest in cannabis is finally nigh. In KEY’s most recent report “Cannabis 2.0: Investing in Today’s Regulated Industry”, KEY points to the $90bn global illicit market demand as the total addressable market (TAM), although this number may be an underestimate. Some estimates put the US opportunity, based on the current black market, at $100bn, but it could be even higher. KEY notes that there is an unknown population of individuals who won’t or can’t buy cannabis illegally, which would make the legal TAM even bigger.
KEY also notes that cannabis companies are enjoying rapid growth at much lower valuations than other vice stocks of tobacco and alcohol companies. Recently, KEY has shifted its focus from mainly ancillary investments to a fair mix between ancillary businesses and plant-touching businesses.
KEY highlighted the lack of institutional investor participation in the asset class (less than 2% of listed cannabis securities floats in Canada are held by institutional investors), but noted that the interest from institutional investors in 2022 had doubled since past years.
According to market research firm BDS Analytics, sales of legal cannabis reached $23bn in 2021, up 30% from the year before. This growth is expected to continue, with legal cannabis sales predicted to displace almost one-third of the US black market by 2026.
President Biden’s Statement on Cannabis Reform
On October 6th, The President echoed statements made on his campaign, saying that no one should be in jail for simple use or possession of cannabis and announced three steps to address the issue.
First, he is granting pardons for all prior federal offenses of simple possession of cannabis and directing the Attorney General to develop a process for issuing certificates of pardon to eligible individuals.
Second, he is urging Governors to do the same for state offenses. Third, he is asking the Secretary of Health and Human Services and the Attorney General to review the scheduling of cannabis under federal law, which currently classifies it in Schedule I alongside the most dangerous substances like heroin and LSD.
The President emphasized that even as federal and state regulation of cannabis changes, important limitations on trafficking, marketing, and under-age sales should be maintained. The President’s actions aim to address the disproportionate impact of cannabis possession on black and brown communities, as well as the collateral consequences of criminal records for employment, housing, and education.
Congress Sends First Cannabis Bill to Biden
On November 16th, the Senate passed a bill that expands medical cannabis research by unanimous consent after the house passed the same bill by unanimous consent in July. This is the first standalone cannabis-related bill to be approved by both chambers of Congress.
The bill, sponsored by Senator Dianne Feinstein and Representative Earl Blumenauer, aims to make it easier for scientists to conduct research on medical cannabis and to protect doctors who discuss the drug’s benefits and drawbacks with patients. The bill now awaits President Biden’s signature. The legislation also sets the stage for ongoing discussion on the Safe Banking Act and marks a significant shift in cannabis policy, as it reflects changing attitudes about cannabis and its potential medical benefits. In the past, scientists were only permitted to use cannabis grown by the University of Mississippi, which was not representative of modern-day dispensary products.
During his campaign, President Biden stated that cannabis research should be made easier and, in late 2022, he issued an executive order directing the Department of Health and Human Services to review available research on cannabis and provide a recommendation to the Department of Justice on reclassifying or declassifying cannabis from the Controlled Substances Act.
50% of Americans Now Have Access to Adult Use Cannabis
November 2022, Maryland and Missouri passed legalization referendums, bringing the total number of states where anyone at least 21 years old can legally possess cannabis to 21. This marks a significant shift since Colorado and Washington became the first states to fully legalize cannabis in 2012. However, voters in Arkansas, North Dakota, and South Dakota rejected recreational legalization measures.
While people will soon be able to legally purchase and use cannabis in 21 states, cannabis remains classified as a Schedule I drug on the Controlled Substances Act, the same category as heroin. This means that cannabis use can still disqualify individuals from applying for a security clearance or entering the US military, and cannabis businesses operating in state-legal markets may struggle to access traditional financing services like opening a bank account or getting a small business loan. In response to this, President Biden announced last month that he would be issuing pardons to people with federal cannabis possession offenses and directing federal agencies to review whether cannabis should be reclassified under federal law. The potential reclassification of cannabis could have significant implications for the industry.
Could an Oregon Lawsuit Legalize Interstate Cannabis Commerce Before Congress?
December 2022, It is possible that a recently filed lawsuit challenging Oregon state law could lead to a future where cannabis companies can ship products across state lines without interference from federal or state authorities, although this outcome may require legal challenges in other states and the willingness of businesses in those states to accept out-of-state cannabis.
On November 17th, Jefferson Packing House, a licensed Oregon distribution company, filed suit against Oregon Governor Kate Brown and other state officials seeking to overturn a section of Oregon law that prohibits state-licensed operators from shipping cannabis across state lines on the grounds that such a prohibition is unconstitutional. The suit uses the same logic that was successful in overturning a state residency requirement for Maine medical cannabis operators earlier this year. If a judge agrees and the ruling is upheld, regulators in both Oregon and the target state would have to create a “regulatory pathway” for licensed companies to begin shipping cannabis. However, it is unclear if they would be required to do so if the export prohibition is struck down or if they would need to be compelled to do so via more legal action. It is also uncertain how welcoming existing cannabis businesses in the target state would be to new competition.
New York City Sees First Adult Use Cannabis Sales
December 29th, Nonprofit organization Housing Works has become New York’s first licensed adult-use marijuana store and is set to open its doors on Thursday at 4:20 p.m. ET in the city’s NoHo neighborhood.
Its newly established brand, Housing Works Cannabis Co., has been working around the clock to convert a long-vacated Gap location into a 4,000 sq ft retail space to meet demand. The store will offer consumers an array of cannabis products, including edibles, tinctures, pet treats, vapes, flower, pre-rolls and accessories, for Day 1 sales.
It is expected that adult-use retailers in New York will generate $1bn-$1.2bn in sales in 2023 and $2.2bn-$2.7bn by 2026. Housing Works is one of seven nonprofits in the state that have conditional adult-use retail dispensary licenses and will redirect all proceeds to fund community services. Regulators in New York plan to issue up to 175 retail licenses (25 of which are earmarked for nonprofits).
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