Poseidon Research Note: States Reform Act

U.S. Rep. Nancy Mace (R-SC) introduced legislation today to decriminalize cannabis at the federal level, offering Republicans a more conservative approach to legalization which proposes taxing and regulating it more like alcohol. From a legislative timing perspective, the bill doesn’t make sense to be released now other than to pressure Schumer and Democrats to step up after they failed with federal cannabis reform of any kind in 2021. The announcement of the bill gave the cannabis industry and markets something to get excited about after being left out to dry by the Democrats this year.

We are excited for the prospects of Rep Mace’s States Reform Act as a competing bill to Senator Schumer’s Cannabis Administration and Opportunity Act. We feel this bill takes a much more realistic approach to driving federal cannabis reform and addresses pressing needs in a more timely manner. The bill addresses more of the lower hanging fruit that could have a realistic chance of gaining bipartisan support in both chambers of Congress. Social justice reform, decriminalization, descheduling, medical and scientific research, and veteran access to medical cannabis should not be used as negotiating tools for a greater federal legalization bill that has no chance to pass in the current political landscape. These are issues that need to be reformed now as every day another person goes to prison for cannabis or is not allowed access to medication.

Some of the highlights of the Bill include:

• Federal decriminalization and the removal of cannabis from Schedule 1, thus allowing medical and scientific research.
• States will remain in control of their own course for legalization, including the ability to leave existing cannabis state laws unchanged.
• Federal regulation will be analogous to alcohol, utilizing departments such as the US department of Agriculture, the Bureau of Alcohol, Tobacco and Firearms, and the Food and Drug Administration. First federal legislative proposal to have a provision which established a process to declare cannabis a cash crop under the U.S. Department of Agriculture (USDA) and introduces a regulatory framework that taxes cannabis like wine under the Tobacco and Tax Bureau (TTB) while maintaining strong consumer protection and research within the purview of the Food and Drug and Administration (FDA).
• Federal tax of 3% to fund law enforcement, small businesses, and mental health initiatives. Schumer’s bill has a federal tax rate that steps up to 25% in year five which will throw more fuel on the illicit market.
• Sets the potential for future inter-state/international trade by calling for the removal of ‘unjustified’ barriers for American cannabis products/raw materials.
• Protects the existing medical users, including safe harbor provisions for state legal medical programs, patient access, and continued research and product development.
• Specific language and protections for medical use by Veterans.
• Nonviolent cannabis-related criminal record expungement and releases from prison for approximately 2,600 convicted offenders.
• Allows access to cannabis to only those aged 21 or older (unless for medical purposes).
• Will provide funding for substance abuse and mental health services.

Though this piece of legislation has no chance to pass in 2021 and little chance to pass a Democrat controlled House and Senate ever, it has been the macro driver the industry has been seeking since March. The rumor of this bill which first circulated on November 5th has caused the American Cannabis Operator Index to increase by 20% since then. That translates into investor interest in the private markets and in small businesses as well.

This is the type of common-sense legislation that will help strike balance to the overly aggressive Schumer bill. For the first time in history, he has an opposing cannabis legalization bill on the table from the other side of the isle. If the Dems don’t play their cards right, they could go into the 2022 midterms with no federal cannabis reform after two years of full control, and an opposing party who is now championing the issue on some levels. Not achieving any social justice, veteran access, or medical research reform at the federal level would be an embarrassment to the party.

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Disclosure
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Poseidon Investment Management, LLC is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.
This note contains opinions, which are expressed as of November 15, 2021 which may be updated or amended and may change as subsequent conditions vary.
This note should not be construed as legal, tax, or financial advice.
Certain of the statements set forth in this note constitute “forward-looking statements.” All such forward-looking statements involve risks and uncertainties, and there can be no assurance that the forward-looking statements included in this memorandum will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as representations or warranties of Poseidon Investment Management, LLC or that such statements will be achieved in any specified time frame, if at all.

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