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Look Before You Leap

Greetings,


In case you were averting your eyes from TV or boycotting the Internet (the Kardashians need you, come back), we feel it’s time to provide an update on the U.S. Federal election. Stop booing! Uncle Joe defeated Donny by 7M popular votes and 74 electoral votes to become (after Wednesday) the 46th President. The Democrats lost a few seats in the House but still maintained control, while they pulled a March Madness-style upset (remember March Madness?) in the Senate by gaining just enough seats to take control.

With the cannabis-friendly Democrats in charge, there has been a burst of optimism around Federal legalization. Could we suddenly be on the verge of a major policy change, which previously looked much farther away? The equity markets are convinced (and let’s be honest, Robinhood users don’t take much), with both Canadian and U.S. listed stocks doubling in value since October. Eat cannabis dust, Bitcoin.

In attempting to digest this unforeseen turn of events, we looked for inspiration from all the traditional sources (e.g. our moms, Tik-Tok, Starbucks baristas, etc.). For this missive, however, we instead chose a 19th century British author named Samuel Butler, who poetically cautions his readers “Look before you leap for as you sow, ye are like to reap.” For us, this ditty reminds us to sharpen our pencils again and dig in.

For starters, what could national legalization conceivably look like? We note the three key pieces of cannabis legalization in Congress right now (I guess they have been working after all!), all of which address the issue in different ways. First, there’s the STATES Act, which protects states’ rights to enact their own cannabis policies without federal interference. Second, there’s the SAFE Act, which provides safe harbor to banks and financial institutions providing financial services to cannabis companies. Third and lastly, there’s the MORE Act, the most comprehensive of them all, which federally decriminalizes cannabis and provides various provisions to address social equity.

While these bills are each impressive in their own right, we don’t see them any of them as a silver bullet for building a national cannabis marketplace in the near term. Below is a short (but by no means exhaustive) list of some of the complexities that lay ahead. First, there’s interstate commerce, which has historically been the Federal government’s terrain and is particularly critical so production can scale in cost efficient areas instead of having to be replicated in every state. Next is the tax man, specifically Federal excise tax levels as well as Rule 280e, which limits cannabis companies to only deducting direct product costs from gross income. And what about those pesky lawyers? We can point to several thorny issues from our California experience, such as limitation of liability and lender rights. Finally, there’s a range of other business issues that the Federal government traditionally has a big say in, such as consumer marketing rules (will cannabis be like cigarettes or alcohol?), safety testing standards, and product labeling requirements. Put more simply, from our experience in California, there’s an awful lot of regulatory agencies in the U.S. that want to have their say and, even once this happens, they are prone to change their minds seeking better results.

So, while we love optimism finally igniting the cannabis industry (it’s about time!), we are still sticking to our knitting (yes, we knit) in California investing. Ultimately, we think the products, brands, and know-how in California are far ahead of other states and, when the time is right from a regulatory perspective, these will be easily exportable and big market share gainers.

In the meantime, let’s continue our journey together in cannabis, always being careful to look before we leap. Thanks for tuning in, and until our next update, please stay safe and healthy.


Cheers,

Mike, Kip, and Austin

Co-Managers, Presidio View Capital