Time for U.S. markets to show some love to cannabis companies, no?
"This is one of the great tragedies of the cannabis industry," said Kris Krane, president and co-founder of cannabis-focused investment management firm 4Front Ventures. "We're giving this industry to Canada."
Medical cannabis has been legal in Canada since 1999, and lawmakers in the country are expected to finalize laws to legalize recreational cannabis at the federal level this summer. Because of its more lenient regulations, Canada has become home to many of the world's largest cannabis companies.
By contrast, lawmakers in the U.S. have taken a state-by-state approach to legalizing cannabis. There are currently 30 states with some degree of legal cannabis, but due to the lack of federal-level regulation, those 30 must typically confine their business to remain within state lines.
What's more, U.S.-based exchanges are forbid from listing shares of U.S.-based cannabis companies, as the firms that occupy the big boards on the New York Stock Exchange or the Nasdaq Composite are required to obey federal-level law. That means that even if a company only operates in states with legal cannabis, it can't list on U.S. exchanges because of the lack of federal regulation.
With that, the capital of an industry expected to grow to $140 billion globally in the next decade is flowing almost exclusively to Canada. According to experts, U.S. financial markets are whiffing on a major opportunity in a high-growth space. The U.S. is "definitively" missing out, said Acreage Holdings CEO Kevin Murphy to TheStreet.
"Frankly in Canada this industry is going to replace metals and mining. It's an incredible industry. And on any given day the most active stocks on the Toronto Stock Exchange are cannabis stocks," Murphy said.
Jason Wilson, president at Budding Equity Asset Management, estimated that there are currently about $7 billion to $8 billion in annual cannabis sales in Canada, plus a nearly $2 billion tax opportunity for the government. Because the Canadian market is only about the size of the state of California, the total U.S. opportunity is roughly 10 times the size of that in Canada, Wilson said.
That means as much as $80 billion in lost sales for the U.S., plus as much as $20 billion heading into government coffers via taxes.
Beyond just publicly traded shares, the U.S. appears to be crippling growth for any domestic-based firms, private or public. Because of the nebulous nature of state-by-state regulation, many banks and traditional avenues of capital are hesitant to lend to cannabis companies. It's proven to be a different case in Canada, where companies find it far easier to grow to scale and compete on a global level.
"[Canadian companies have a] tremendous advantage and a tremendous head start over their competitors," Krane said. "The American companies just can't compete."
Krane added, "They've got access to cheap capital and the ability to use that cheap capital to expand in a way that even those with the best valuations in the U.S. just can't compete with."
"Where I feel that the U.S. is really missing out is that without proper funding and without proper capitalization, it's hard for small businesses to get federally funded loans or even open a proper bank account in the U.S.," said Wilson. Without the bones to build scale, smaller cannabis companies will stay just that -- small.
A lack of scale nearly promises small companies won't be able to partake in the broader global cannabis industry. Wilson pointed to countries like Germany and Italy, where cannabis is federally legal but producers can't grow enough to meet demand.
Wilson said due to federal regulations, the only entity allowed to grow cannabis in Italy is the military. But they can only pump out "a couple hundred pounds" of cannabis per year -- not nearly enough to meet the demand of the country. Italy has subsequently taken to importing cannabis from Canadian-licensed producers like Aurora Cannabis.
Until U.S. lawmakers enact more sweeping regulation to end the cannabis prohibition, U.S. markets will be unable to capitalize on the perks of public trading, the influx from export deals and the high-growth funding opportunities, Wilson, Krane and Murphy all said.
"The U.S. is traditionally a hub of innovation," said Wilson, "but they're lagging in this new asset class."