The 4/20 Cannabis Summit: Hope For SAFE Banking And The Future Of Cannabis Legislation

The historic event that took place in the US Capitol last Thursday, was, obviously, not about SAFE Banking. It was about the legalization process, restorative justice, social equity, and the various other bills that have been tabled around cannabis. But if you follow cannabis stocks, and your focus is insular, everything that was said around SAFE was encouraging. We realize that after the disappointment of Dec’22, cannabis investors seem to have switched off and will at best say “here we go again”. Still, SAFE is arguably the only cannabis bill that may pass in the 118th Congress (not counting another research bill, this time related to the VA, that may pass via cloture soon), in our view.

But a word on fundamentals first (they should matter too, no?).  Cannabis industry fundamentals, despite macro/consumer pressures, deflation, and lack of capital access, point to net positives. More states are legalizing adult cannabis (since Dec, RI, CT, MO, DE, MD) and MN could be next. KY just approved medical cannabis (MMJ) and we understand MMJ in TX (although initially quite restricted, like GA) could go live in early 2024 (TX is taking license applications as we speak); the Carolinas may follow. Price compression remains an issue, but at least in the case of CA prices are starting to bottom (but remain low). There is also greater political awareness at the state level of the need to fight the illicit market. 

All that said, as well all should know by now (see the cannabis stock chart starting Oct’20), whether we like it or not, chatter around federal level reform (in its various forms, whether coming from the Executive or Legislative branches), remains the main driver of cannabis stocks performance, by far, in our view. In fact, we estimate that while cannabis stocks are down 90% from their Feb’21 peak, US legal cannabis sales have gone from a $20Bn annual run rate to now close to $30Bn. So, investor sentiment on reform has trumped industry fundamentals. Beyond reform news, Although to a lesser extent, other non-fundamental sentiment drivers include banks offering (or withdrawing) custody services to investors, and stock exchanges allowing cannabis companies’ exchange listing choices (say, a US plant touching company listing in the TSX, or a NASDAQ-listed Canadian licensed producer consolidating plant-touching US assets).

In that context, we were encouraged by the comments made by Senators and Congressmen/women that spoke at the National Cannabis Policy Summit in the US Capitol on 4/20. Particularly around the potential passage of SAFE Banking. But some context about the DC event should be noted. It was organized by advocates of legalization, restorative justice, expungement of non-violent marijuana offences, and of building a legal framework for the industry that factors social equity. So, besides Senators and House Representatives, we heard speakers from the Marijuana Policy Project, Drug Policy Alliance, ACLU, Last Prisoner Project, National Organization for the Reform of Marijuana Laws (NORML), Minority Cannabis Business Association, and the National Cannabis Industry Association. Interestingly, the Libertarian leaning Americas for Prosperity was there too. In other words, this was not a forum where SAFE was the main topic.

Still, from a stock perspective, we think the comments made around SAFE were positive for cannabis stocks. 

Pardon all the details here, but they matter: Based on comments made by Senators Schumer (D-NY) and Merkley (D-OR; sponsor of SAFE in the Senate, together with Sen Daines) at the 4/20 forum, it would seem a vote on SAFE in the Senate is quite likely in this Congress - that would be a first. While not at the forum, Sen Booker (D-NJ) in recent days also expressed support for SAFE passage in this Congress. On the other hand, Sen Daines (R-MT) was not at the forum, and he told Politico that the bill is not ready yet. Because Sen Brown (D-OH; Senate Banking Committee Chairman) had publicly said they were planning committee hearings on SAFE, that were postponed due to the recent banking crisis, the comments by Sen Daines were taken negatively by those that follow cannabis stocks. We disagree with that read. In our view, the person quarterbacking this process is Congressman David Joyce (R-OH); he alone, probably has a better sense of what/how/when SAFE could go through the House (committee hearings; an actual vote). So, then why rush the Senate effort, if the timing in the House is not right (debt ceiling, investigations, priorities as per the House GOP’s “Commitment to America” agenda, etc.). At least Sen Daines acknowledges that works is being done on SAFE. Besides, Sen Daines may hold the keys to getting those 10 Republican Senate votes for SAFE.

Importantly, unlike in the past, when SAFE passed the House seven times but the Senate never put it up for a vote, we think the process will be different this time. It will start in the Senate (sponsored by Daines/Merkley) and only then go to the House. Why? We think that approach will make it more palatable for House Speaker McCarthy to put SAFE up for a vote (and host related committee hearings); at the end of day, at least half of his caucus supports SAFE (if we go by past votes), including some of the so-called “rebels”. The Speaker also voted in favor of SAFE in the past.

To summarize, if the question is which has higher probability in this 118th Congress, Senate passage of SAFE (60 votes) or Speaker McCarthy putting SAFE for a vote in the House, we believe the latter is more likely. So, if Sen Schumer and Merkley are correct (about passing SAFE in the Senate), then SAFE being enacted in this Congress is a very real possibility. When will cannabis stocks begin to reflect this outcome?

Below, we summarize, a few factual snippets based on comments made by the speakers on Thursday,

• Sen Schumer (D-NY): “…happy to pass the research bill last year, working on SAFE Plus this year, but the ultimate solution is comprehensive cannabis reform”. Also working on crime expungements. Plans to reintroduce the CAOA (“it’s a good marker”). More than once (re the topic of comprehensive reform), he said “it will not be easy in a divided Congress”, while implying SAFE is doable.

• Sen Merkley (D-OR): Regarding SAFE, he is “excited where we are now, and plan to file the bill soon”. He implied it will have few add-ons but did mention HOPE (we assume GRAM, too). He publicly thanked Sen Daines for his work on SAFE. He said there are eight years of efforts behind SAFE and reminded everyone that SAFE had nine Republican co-sponsors in the Senate the last time around. He sees “a real path to getting it done in the Senate”. 

• Rep Blumenauer (D-OR): He touched on several aspects around cannabis reform (he started the Congressional Cannabis Caucus), but re SAFE he said Sen “Schumer will unlock the Senate” (he “has one vehicle that works now”). In our view, Rep Blumenauer also recognized that with House Judiciary Committee Chairman Jim Jordan (R-OH), social justice add-ons to SAFE may be difficult to get through. He also sounded hopeful about President Biden’s actions re the scheduling review - like all speakers, he is calling for de-scheduling as opposed to re-scheduling. Note: The latter is fodder for a separate report, but we are skeptical on a final CSA review decision without an accompanying comprehensive regulatory framework (we think a Cole Memo II is more likely than de-scheduling). 

• Rep Mast (R-FL): He said he is a libertarian and a firm believer on states’ rights. He is a sponsor of the Veteran Equal Access bill (together with Rep Blumenauer). He said he supports SAFE Banking. He also implied that longer term a constitutional amendment could help end the prohibition of cannabis (as the 18th amendment ended alcohol prohibition).

• Rep Joyce (R-OH): He has re-filed the HOPE and PREPARES acts. He argues the federal government must prepare for eventual legislation. He noted beer is regulated state by state, but there is a federal framework, and the same approach should be used for cannabis. He recognizes PREPARES is not the “end product, but an accelerator”. Sen Hickenlooper (D-CO), as part of the panel he shared with Rep Joyce, said “decriminalization does not have 60 votes in the Senate”. Rep Joyce said little about SAFE (intentionally, in our view). 

• Rep Mace (R-SC): She implied it would be tough to enact “substantial reform” in the current Congress. She supports SAFE, wants to remover 280E, and thinks Congress could be doing more to help small businesses in the cannabis industry.

The above reflect the writer’s opinions only and should not be taken as investment advice. 

Pablo Zuanic is a well-known and highly rated equity analyst most recently following the cannabis and psychedelics sector. Over the past four years he launched coverage of over 35 companies (MSOs, LPs, CBD, MJ ancillary, mental health clinics), kept close track of sectoral trends, and followed the reform process in the US and elsewhere.  Pablo is in the process of launching a curated, unbiased, comprehensive, thoughtful, data-driven research subscription service on the cannabis and psychedelics sectors aimed to institutional investors and the industry.  He is also available for short term consulting and research advisory projects. He can be reached at pablo.zuanic@zuanicgroup.com.