Happy New Year! We hope you saved champagne and confetti, because the cannabis industry should give us reason to celebrate in 2018. Most importantly, California launched recreational cannabis, which creates the largest legal market in the world. As a reminder of its scale, there are 39M people in California (12% of the total U.S.) generating $2.6 trillion in GDP, enough to make it the sixth largest country in the world. With the California launch, recreational cannabis now covers one-third of the U.S. population - pretty impressive for an industry that started in 2012!
In a second positive development, Constellation Brands – a Fortune 500 producer of beer, wine, and spirits – purchased an ownership stake in Canopy Growth Corporation – a leading provider of medicinal cannabis in Canada. This transaction is really exciting, as it’s both a $200 million vote of confidence in the industry plus a sign of potential exit opportunities for private investors in the future.
But alas, what is success without a few speed bumps along the way to build character? On January 4th, Attorney General Sessions threw cold water on the party by rescinding the Cole Memo – the 2013 DOJ missive that de-prioritized federal prosecution of cannabis cases as long as state laws were followed and specified federal prosecution priorities were not implicated. The Cole Memo was a strong signal that states could chart their own course without federal intervention and it coincided with a sharp rise of state legalization. While Sessions has long been critical of cannabis, the move was a surprise given previous comments by both Sessions and President Trump in favor of states’ rights and the broader principles of the Cole Memo.
So, what does this new directive actually mean? Certain media outlets were in dismay – consider HuffPo’s article "Sessions Unleashes Federal Prosecutors on Legal Marijuana" or Time’s "Sessions Marijuana Move Jeopardizes Legal Weed Industry." But after reading the text of the memo (crazy, we know), we are more sanguine. Unlike some feared, the memo does not direct federal prosecutors to prioritize cannabis prosecutions. Instead, the memo directs federal prosecutors to follow the “well-established principles that govern all federal prosecutions…as reflected in chapter 9-27.000 of the U.S. Attorneys’ Manual” and provides that, when deciding which cases to prosecute “with the Department’s finite resources”, federal prosecutors should “weigh all relevant considerations of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” Given the tone of the Sessions memo, we believe prosecutors will focus on problems that have demonstrably adversely affected their communities, such as the opioid crisis or cannabis operations that flout state laws, target minors or cross state lines. We simply do not believe the federal government will ignore popular opinion favoring legal cannabis and deprive states of much needed job growth, investment, and tax revenue. Even if federal prosecutors were to do so, they would be slowed by the Rohrabacher-Farr Amendment, which limits funds available to prosecute legal medical cannabis. Also, we understand that federal prosecution of state law-compliant cannabis businesses has historically been very limited, including before the Cole Memo, and has typically only involved scenarios where the prosecution priorities established in the Cole Memo are involved. Lastly, the unclear posture of the DOJ may actually compel Congress to act sooner than it would have otherwise – as the public demands a clear national cannabis policy.
In summary, despite the dramatic headlines, we feel as optimistic as ever about the long-term prospects of the cannabis industry. One simply has to stop by the recreationally licensed dispensaries in San Francisco – with lines out the door and around the block – to observe the large, pent-up demand for this product. And with this strong demand comes a healthy environment for start-up businesses cultivating, refining, and distributing products. We look forward to providing you with more industry and business updates in the coming months. Stay tuned!
A little about us: Presidio View Capital is an asset management firm and we are excited to announce the launch of Presidio View Capital Partners, L.P., which is one of the first venture capital funds focused on cannabis-related investments.
Mike and Kip
Co-Managers, Presidio View Capital