Jun 11, 2019

Cannabis is Legal in Canada – What Does That Mean for the U.S.?

It’s been a bit over half a year since cannabis legalization in Canada has become a reality. In case you’ve been living in a cave, in October of 2018, Canada became the second country to legalize pot, after Uruguay. More importantly, it is the first developed nation to legalize. It is now legal for adults to possess up to 30 grams of dried marijuana flower everywhere in the country, and Canadians can grow up to four cannabis plants per household.

Meanwhile, in the U.S., Cannabis remains illegal at the federal level. This goes for medical use as well as adult, recreational use. Its status as a Schedule I drug means that it has “no currently accepted medical use,” according to the DEA, and also has a “high potential for abuse.”

Public support for legalization is at an all-time high

The public very clearly disagrees with the DEA’s sentiment. According to a Gallup poll conducted in 2017, 64% of Americans believe that cannabis should be legal, including 51% of Republicans, who have historically opposed legalizing marijuana.

There are 31 states that have legalized the drug in some form, and 10 of those states allow recreational use by adults 21 years of age and over. At least one more state will be added to that list in 2020—Illinois just passed their Cannabis Regulation and Tax Act in May of 2019. It will take effect on January 1.

For the time being, the federal government is taking a “hands-off” approach to cannabis in the states that allow it. While it seems likely that there will be changes in the federal law to more explicitly permit states to legalize, as of now, cannabis is not legal in the U.S.

This leaves us to wonder, how will Canada’s emerging cannabis market impact weed businesses here, particularly as our laws catch up to public opinion?

The benefits to American weed businesses

It’s difficult to say with certainty how Canadian cannabis laws will affect marijuana businesses here in the U.S. Most likely it’ll be neither entirely positive nor completely detrimental. Though we can’t predict whether Canada’s legalization will prove to be a net positive for U.S. “cannabusinesses,” there are some potential benefits that seem very likely.

We have a chance to learn from Canada’s experience

Though legal cannabis is technically not a new thing—it wasn’t until 1937 that the U.S. officially prohibited its use—a well-established and well-regulated legal industry is something we have not experienced prior to this century. In fact, it has only been in the current decade that we’ve seen significant growth. Worldwide, it remains illegal almost everywhere.

This means that there isn’t a tried and tested model for how to best regulate the newly developing marijuana industry. By allowing Canada and, to a lesser extent, Uruguay to take the lead, we are able to see where their laws are working. More importantly, we can note where there are problems and look for ways to avoid them in our own cannabis regulations.

American cannabis companies can raise capital by listing their stock on Canadian exchanges

While U.S.-based marijuana businesses aren’t able to sell stock on domestic exchanges until the federal law changes, they are able to list their offerings on either the Canadian Securities Exchange (CSE) or the Toronto Stock Exchange (TSX). In fact, as of last year’s end, almost half of the cannabis stocks trading on the CSE were United States-based.

This gives Americans a chance to raise capital in anticipation of changing laws here. They are able to continue operating within the legal grey area here while investors north of the border provide the funds they’ll need to expand when our federal government allows it.

Established Canadian companies will have capital to invest in U.S. businesses

Under our current laws, pot businesses in the U.S. are somewhat hindered in their ability to grow. That also means that they may not have the funds needed to expand quickly when (if?) the laws change, which could give large corporations an advantage.

Many American corporations that have a long history in other “vice” industries like alcohol and tobacco are already preparing to enter a legal marijuana market. Smaller cannabis-related companies would likely have a difficult time competing with these corporate giants if they aren’t able to raise the money they need to keep up. Companies in Canada that already have experience in the legal industry will be a likely source of investor dollars to allow those smaller American businesses to grow.

The downsides of Canada’s legalization for U.S. marijuana companies

While there are some pluses, Canada’s head start is likely to create a few disadvantages for Americans, too.

Canada has a head start at becoming a global market leader

It appears likely that cannabis legalization is going to continue to expand globally. This opens up the possibility of export business in those countries that have the product to ship. As the first developed country to legalize, Canada is in a prime position to become a dominant force in a new worldwide market. Especially if more countries begin allowing legal cannabis before we do, Canada might become the leading supplier to those countries’ newly developing industry.

As of now, Canada isn’t allowing export of cannabis, so the U.S. still has a chance at taking the lead here. Nonetheless, as things stand, they have the advantage.

American investor dollars going to Canadian businesses

Many investors in the U.S. are seeing cannabis companies as great investment opportunities. Unfortunately, though, they aren’t able to purchase stock in American marijuana businesses. Exchanges here will not list cannabis companies while the plant remains federally illegal, forcing those who wish to purchase weed stocks to either invest on Canadian exchanges—not a completely straightforward thing to do—or to put their money into Canadian companies listed on the Nasdaq or NYSE.

This is one of the oddities of cannabis investing. Because Canadian companies aren’t subject to our laws, our stock exchanges will list companies that are operating legally in Canada even though their business would be illegal domestically.

The American black market

One of the most frequently cited benefits of pot legalization is that it can eliminate the black market. Those who operate illegal businesses aren’t concerned with regulations, which is a problem for consumers who know very little about the source of their illegally-purchased product. While state-by-state legalization has helped, the black market still exists in states that haven’t legalized, and even competes with legalish businesses in many legal states; this is particularly true where state regulations create artificially high prices for legal cannabis.

Aside from the risks of purchasing black-market products, there is also the problem of arresting those who are otherwise law-abiding citizens—many of whom use cannabis for its medical benefits.

The good news

While Canada has a head start, it is very probable that cannabis will be legal in the U.S. in the near future. Our country’s size, compared to Canada, can give us an edge in the worldwide market. We have large companies with the resources to quickly take the lead over Canadian cannabis businesses. The sooner legalization happens here, the better we’ll be able to compete in this newly-developing, and fast growing, industry.

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