Tuesday is 4/20 and naturally one’s mind—or at least my mind—turns to weed.
The big news here is that the tide has turned for marijuana acceptance in this country. And it’s quite likely national marijuana laws will be reformed sometime this year. Note I did not say weed would be fully legalized, I said "laws will be reformed," an important distinction, but still huge as I’ll explain.
Consider where things stand. Already this year New Mexico, New Jersey, New York and Virginia have legalized weed, which if you add them to the existing legal states, means some 43% of the U.S. population now lives in states where recreational marijuana is legal, as noted by Vox in a recent story headlined "Marijuana legalization has won." On tap this year are possibly Connecticut, Delaware, Minnesota and Rhode Island, while others like Wisconsin and Maryland are considering it as well. The record years for states legalizing weed were 2016 and last year at four. It’s conceivable that could be doubled this year.
In 2000, only one-third of Americans were in favor of legalization and as recently as a decade ago not a single state allowed for recreational marijuana use. Now two-thirds of Americans support legalization, according to Gallup, an all-time high and 18 states are fully legalized, with weed-friendly bills even passing in red states. My fave ballot factoid: “In the 2020 election, the legalization initiative in swing state Arizona got nearly 300,000 more votes than either Joe Biden or Donald Trump.”
Mexico is set to legalize recreational marijuana this year, which is already driving down prices and unsettling growers for the cartels. That would leave the U.S. flanked to the north and south by two of the three only legal weed countries on the planet. (The third being Uruguay.)
All this gives proof yet again to that old business maxim, change happens slowly at first and then all of a sudden. Weed’s now inexorable acceptance reminds me of what happened with same-sex marriage during the previous decade. Beginning around 2010, primarily blue states made same-sex marriage legal. Then came a flood of states a few years later, and finally, Obergefell v. Hodges, the Supreme Court decision in 2015, made same-sex marriage legal in all 50 states.
Indeed the news is coming so fast and furious that this article will likely be sorely dated this summer. Consider what just happened in Virginia. Last week, the Commonwealth legalized recreational weed, making it the first Southern state to do so. Gov. Northam said that legalization was at least in part “...to address racial disparities in our criminal justice system…” (More on that later.) Here’s the wrinkle, weed wasn’t going to be legal in Virginia until 2024, but constituents pushed and the governor fast-tracked it to July 1. So just 10 weeks from now, adult Virginians can possess or grow marijuana, though there still won’t be any sales in the state until 2024.
On the Federal level, Senate Majority Leader Chuck Schumer (D-NY) says he will introduce a bill to decriminalize weed “soon.” Schumer says he wants to ensure that small businesses benefit and that Big Tobacco and booze companies don't come to dominate the market. It should be noted that President Biden remains opposed to full legalization. It should also be noted that so were then-Colorado Gov. John Hickenlooper and Washington state Gov. Jay Inslee—until they weren’t. (It’s a politician’s prerogative to change his or her mind, right?) Many Republicans remain opposed to legalization though it certainly isn’t a hot-button issue for them. Tax revenue, without serious societal consequences, has a way of changing folks’ minds.
It all boils down to this though: The reasons to legalize marijuana outweigh the reasons to keep it illegal.
Let’s get out the scales.
Why marijuana should remain illegal: It’s addictive to some people. It’s bad for teenagers. It may be a mental health risk to some. One should not drive, operate heavy machinery or farm machinery while partaking. It can be a gateway drug. And finally the last thing America needs is another legal drug (besides alcohol) or vice (besides gambling.) All true.
Why it should be legal: It is less harmful than alcohol, indeed than nearly any other drug. We spend $3.6 billion each year policing marijuana, according to the ACLU with (until recently) hundreds of thousands being arrested and incarcerated each year—to accomplish what exactly? The human toll here, particularly on people of color (see below), is incalculable. Meanwhile, legal weed creates jobs and tax dollars. And more to come: One study says the business could create a million jobs and $106 billion in tax revenue by 2025. (Still very significant even if it’s only 50% of that.) Legal weed mostly removes criminals from the business. (Think the end of Prohibition.) And of course there are proven medical uses for marijuana.
But most significantly, millions of people use marijuana regularly, for the most part without ill effects to themselves or society, and wish to continue to do so, legally. The places where weed has been legalized—from Denver to Toronto to Montevideo—have not seen an unacceptable increase in negative effects, particularly when seen in light of all the above positives.
To me it’s pretty clear, the ayes have it.
The legalization process is accelerating right now for several reasons. First, governors and legislators who may have been wary are now in no position to be choosy given their COVID-weakened tax bases. (See Gov. Andrew Cuomo.) If your state isn’t legal and the next state over is, which increasingly is the case, the other state will be essentially taking your tax revenue.
Second, marijuana arrests, prosecutions and incarcerations are an Exhibit A of social injustice, which has become a major priority for many politicians. A recent study in New York City for instance showed that 94% of those arrested or given summonses for marijuana last year were people of color, even though marijuana consumption is consumed equally by all. And nationally, a 2020 American Civil Liberties Union study found that Black people are 3.6 times more likely to be arrested for possessing cannabis. You know how it goes: A 17-year-old white boy found with weed in his pocket in Greenwich, Conn., is sent home. A 17-year-old Black boy in the Bronx is sent to Rikers.
Legalizing weed is not quite as simple as flipping a switch though. Norman Birenbaum, New York state’s Director of Cannabis Operations, says he wants to make sure legalization in the state “helps communities disproportionately impacted by cannabis prohibition.” Also some municipalities may choose to opt out of legalization, he notes. Tax policies need to be implemented, and dispensary protocols with an eye to pricing need to be established. “Twelve to 18 months is the timeline for legal sales,'' Birenbaum says. Paradoxically in some liberal states like Maryland there may be less of an urgency to legalize as it’s already decriminalized.
Still the road to national legalization at this point is a state-by-state process. Developments at the federal level will speed up the process, but not in an instant. “A lot of people have it fixated in their mind a magical day of federal legalization and doors thrown open and cannabis thrown on shelves everywhere across America, but that’s just not how these things work,” says Bethany Gomez, managing director at Brightfield Group, a research firm focused on the cannabis industry.
“There was a big misconception when Biden won the White House and Democrats won Georgia runoffs we’d quickly have federal legalization of cannabis,” says Dan Ahrens, managing director and chief operating officer at Advisor Shares, which manages AdvisorShares Pure US Cannabis ETF (MSOS), an ETF made up of U.S. cannabis companies. “That’s extremely misguided. It’s going to come in pieces and it’s going to be messy because politicians have to be politicians. What everybody with knowledge feels strongly is coming is at least the SAFE Banking Act.”
Until the SAFE law (which would allow legal banking by U.S. weed companies) or one like it passes, domestic weed producers are limited in terms of banking services. That has created an unusual, bifurcated set of investment options for investors. On the one hand are a handful of Canadian companies (called Canadian LPs, for licensed producers) which may be familiar to you including Canopy Growth (CGC), Tilray (TLRY), Aurora (ACB) and Aphria (APHA). These stocks boomed in 2019, crashed last year then rose again but are still off a good 30% from their highs of two years ago.
“Canadian licensed producers over promised, overspent and were essentially widely unprofitable,” says Gomez. “The companies had to right-size their businesses, cut a lot of employees and costs. They needed to focus on fundamentals and running a business as a business should be run. That left the industry in a really great position to grow,” Gomez says, noting that consumption and sales stayed strong during the pandemic.
That’s the situation with the Canadian LPs.
The other group of companies, which are based in the U.S., are called MSOs (stands for multi-state operators.) MSOs are not allowed to list on major U.S. exchanges, and instead typically list on smaller exchanges in Canada and then trade in the U.S. over the counter. You may be less familiar with these names which include Curaleaf (CURLF), Trulieve (TCNNF), Green Thumb (GTBIF) and Cresco (CRLBF).
That’s the MSOs.
What the Canadians and MSOs have in common is that both have been, and will be, wild and crazy. “What we’ve seen over the past years in the cannabis space is that there’s a lot of volatility,” says Gomez. “You never know which company will blow up, engaging in illegal activity and get license revoked.” ETFs make sense here says Gomez.
Speaking of ETFs, there are those that allow you to play the global business, focusing on the Canadian LPs, such as ETFMG Alternative Harvest ETF (MJ) (I love the promo on its website right now: “IN CELEBRATION OF 4/20, “CANNABIS DAY”, ENTER TO WIN MJ SWAG!”) And there is one that focuses on MSOs, the aforementioned AdvisorShares Pure US Cannabis ETF (MSOS)—the latter’s top four holdings being (CURLF), (TCNNF), (GTBIF) and (CRLBF.) It’s become a weed investors’ parlor game to debate which one offers the better strategy.
Dan Ahrens explains a key part of Pure US Cannabis ETF model: “We wanted to hold some cannabis stocks directly and wanted access to U.S. multi-state operators by utilizing a counterparty that gives us total return swaps, because under federal law and under the view of a federal custody bank, we couldn’t invest directly into those particular types of stocks. In addition to that, the SEC asked us to get a legal opinion letter written that addressed cannabis and also did upfront discussion of the listing exchange, New York Stock Exchange, to be fully on board.”
At some point in the future, Pure US Cannabis ETF would presumably own MSO shares directly, as Alternative Harvest ETF does with the Canadian LPs. Ditto for Alternative Harvest ETF owning MSO stocks, but not for now.
Jason Wilson, cannabis research and banking expert at ETFMG, which manages the Alternative Harvest ETF (MJ), explains his stance. “We don’t invest directly in MSOs,” he says. “At the time, our custodian wasn’t comfortable with holding those stocks, at least not directly. The only way we could gain exposure was through derivatives. Problem with the derivative approach is it’s calling a fork a spoon.
“We didn’t think it was a prudent thing to do direct investment from an exposure perspective, regulatory perspective, risk management perspective,” he says. “Without question there’s a great opportunity in the U.S. and we do have companies that have exposure to MSO, but what the road map will be is incredibly lumpy.”
Another factor here are large established companies entering the picture, like Constellation Brands, the giant wine, beer and spirits company which bought a stake in Canopy four years ago and now owns 38% of the company, (Canopy’s current CEO came from Constellation.) There’s also Big Tobacco’s Altria (a top 10 holding of MJ) which bought a 45% stake in Canadian cannabis company Cronos in 2018 and has been active in developing weed product expertise and in pro-weed lobbying, according to Forbes. (Note to Constellation and Altria, Chuck Schumer is watching you.)
The creation of a brand new business always brings an interesting cast of characters, in this case some more colorful than for a typical start-up industry, given the product. (Forgive me if this is my favorite part of the story.)
Celebrities have of course entered the fray, or as Inlander notes in this round up: Willie Nelson “is arguably the most famous stoner on the planet — all due respect to Snoop Dogg.”
Lower on the celeb food chain are The Bellamy Brothers, famous for the hit “Let Your Love Flow,” (like a mountain stream!) And who can forget another one of their biggies: “If I Said You Had a Beautiful Body Would You Hold It Against Me.” The brothers are huge in Norway these days, according to Wikipedia, but more to the point, Trulieve is producing a signature line of cannabis products named "Old Hippie Stash,” after, you guessed it, another one of their chestnuts, "Old Hippie.”
Then there’s Russian American billionaire Boris Jordan, Curaleaf chairman, who’s also CEO of the Sputnik Group, which runs the biggest foreign private equity funds invested in Russia. He’s on the board of his alma mater, NYU, and a buyer and seller of Florida trophy properties.
Or billionaire Beau Wrigley, who says of his marijuana company, Parallel, “I think this can be bigger than the Wrigley company. At Wrigley, we brought joy to people’s lives. This is much bigger than that.” The chewing gum heir, who says he’s smoked weed only once, “has stacked his management with executives and advisors from some of the largest and best-known corporations in the world—including Coca-Cola, Walgreens and Patrón Spirits,” according to Forbes. In February, Parallel announced it planned to do a...wait for it...public listing through a SPAC, Ceres, co-founded by high-profile music producer, Scooter Braun, manager of Ariana Grande, Justin Bieber and Demi Lovato. (No word if an NFT is in the works.)
Fortunes will be made and lost here no doubt. But more importantly, lives won’t be ruined over smoking something that through capricious historical precedents became verboten, while alcohol stayed (most of the time) legal.
Twelve years ago, when I was editor of Fortune, we ran a story by Roger Parloff, “Is pot already legal?” with Mary Louise Parker of "Weeds" on the cover (remember that show?) The answer was not yet and it’s still not yet. But it will come. Yes, there will be weed-deniers and unfriendly jurisdictions. Legal wrangling will continue ad infinitum (think blue laws.) On 4/20 a decade from now though, I say it will be all over but the shouting.
This article was featured in a Saturday edition of the Morning Brief on April 17, 2021. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer
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