This Week in Cannabis Investing: Safe Banking Act in Focus During Lame-Duck Session

The Safe Banking Act is proposed legislation aimed at bridging the gap for cannabis companies at the state and federal levels. And with Congress right in the thick of its lame-duck session, the cannabis industry is practically holding its breath to see if federal banking reform will happen. 

It's exciting to see the Senate pass the the Medical Marijuana and Cannabidiol Research Expansion Act and President Joe Biden expected to sign it soon (more on this below), which creates a potential throughline to getting the SAFE or SAFE+ Banking Act done. 

Progress in cannabis banking reform is critical, and we believe this is the best chance to get something done at the federal level for the next few years. There are countless benefits to reshaping how financial institutions can interact with cannabis companies, and new legislation will pave the path to better establishing legal cannabis as a legitimate American industry. 

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President Biden to Sign Medical Marijuana Research Expansion Act

For the first time, we have lived through federal action in the U.S. legal cannabis industry. President Biden plans to sign the Medical Marijuana and Cannabidiol Research Expansion Act. The U.S. Senate approved the bill earlier this month after it was passed in the House over the summer. 

Although this happened with little fanfare or public market response, the bill will ease federal restrictions on scientific studies into cannabis while streamlining the application process for marijuana-related research and making it easier for researchers to request large quantities of cannabis. 

"For far too long, Congress has stood in the way of science and progress, creating barriers for researchers attempting to study cannabis and its benefits," said Oregon Democratic Rep. Earl Blumenauer, who co-sponsored the legislation. "At a time when more than 155 million Americans reside where adult-use of cannabis is legal at the state or local level and there four million registered medical marijuana users with many more likely to self-medicate, it is essential that we are able to fully study the impacts of cannabis use."  

Before now, legacy federal research has been almost nonexistent, given the onerous challenges involved. This new bill is limited in scope, which some pundits were displeased with. However, this simple program was passed in the Senate and now heads over to President Biden to sign into law. Look what happens when bills are not bogged down in complexity! Could this be a precursor to the SAFE Banking Act passing the Senate in the lame-duck session? 

New York Announces its First 36 Adult-Use Cannabis Licenses 

New York is off to a very noisy start in its adult-use cannabis program. This week, state regulators announced the first 36 dispensary licenses. The state is trying to keep to its initial timeline, but many observers see much risk in the proposed program and potential unintended consequences. It appears that they are modeling their cannabis program after the regulation of alcohol.

Previously, regulators stated that vertically integrated operations would be prohibited from opening dispensaries for the first three years of legal sales. To create a consumer-driven market, the state plans to enforce separation between suppliers and retailers strictly.

This approach has numerous shortcomings because the alcohol and cannabis industries are still years apart in sophistication, scale, taxation, etc. For example, alcohol is not subject to 280e taxes and therefore has a much more normalized tax rate. There's more to come here, but onlookers are seeing this launch with a negative lens, likely impacting capital flows. New Jersey, Pennsylvania, Connecticut and Massachusetts could all be beneficiaries as a result.

Q3 Cannabis Earning Are In 

The largest cannabis operators and ancillary companies have announced their third-quarter earnings. We're seeing a continued theme of growing divergence in company performance. Companies that showed good cost containment and capital allocation mostly met their consensus estimates, while their counterparts were disappointed. We expect this theme to continue with the higher-quality groups further separating themselves. 

At Poseidon, we're fans of under-promising and over-delivering and have been waiting to see analysts complete the reset. We expect to see 2023 estimates decrease further given the ongoing inflationary pressures and consumers trading down. It is better to rip the bandaid off and get estimates on the conservative end.

Legal cannabis is an emerging market, so it's fair to give a bit of leeway to analysts trying to understand the space. We also want the market to have more confidence in what's presented to them from an investor perspective. It is worth noting that Morningstar is now starting to view U.S. cannabis operators as small-cap value, a quadrant we were surprised to see but welcomed, given the potential pools of capital that could begin considering the cannabis space for the first time.