Modest federal U.S. cannabis proposal

The formal version of the Cannabis Administration and Opportunity Act (CAOA) was introduced July 21, co-developed by U.S. Senate Majority Leader Chuck Schumer and Sens. Cory Booker and Ron Wyden (all Democrats). A draft version was released a year ago, and while the formal version was expected by April, Sen. Schumer indicated earlier this year that the release would occur before the Senate takes its August recess.

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US Senate address cannabis reforms

The legislation got significant airtime/media attention at the July 26 Senate Judiciary subcommittee’s hearing called “Decriminalizing Cannabis at the Federal Level: Necessary Steps to Address Past Harms.” The hearing will likely offer colour as to how both parties view the legislation.

The legislation would require the Attorney General to finalize a rule removing cannabis from the Controlled Substances Act (CSA) within 180 days of enactment. It would impose a five per cent federal excise tax on small-to-mid-sized cannabis producers, and a 10 per cent tax on large businesses. Those taxes would climb to 12.5 per cent and 25 per cent, respectively, over time.

Criminal records for people with low-level federal cannabis convictions would be expunged. Individual states could choose to prohibit production and sale of cannabis, but not prevent transportation between legal states.

Takeaways from the SAFE Banking cannabis proposal

We believe this legislation is too broad/progressive to gain any traction in a 50-50 Senate, particularly less than four months before midterms. However, we see its introduction (and likely failure) as a necessary step giving Sen. Schumer political cover to pivot his support to more modest reform, such as the SAFE Banking Act.

SAFE was recently attached to this year’s version of the defence bill, passed by the House mid-July. SAFE was attached to 2021’s defence bill but omitted from the final product due to Senate opposition. SAFE was also attached to the House version of the America COMPETES Act earlier this year but was later removed. Whether SAFE survives negotiations with the Senate on this year’s defence bill or not, packaging with a larger, must-pass bill is the likeliest path.

Notwithstanding the low odds of the CAOA clearing the Senate, the space has continued to rally. The active AdvisorShares Pure U.S. Cannabis ETF (NYSE/Arca—MSOS) was up 18 per cent from the all-time low it made at June’s end (in just two weeks). It briefly broke its 50-day moving average on July 20 before closing below it. Momentum (based on the relative strength index) is solidly positive and the strongest since February.

Doug Cooper and Russell Stanley are Toronto-based equity analysts at Beacon Securities.

This is an edited version of an article that was originally published for subscribers in the August 5, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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