Attorney General Jeff Sessions is rescinding an Obama-era policy that helped states legalize recreational marijuana, throwing a wet blanket on the fledgling industry during what could have been a celebratory week.
The Justice Department will reverse the so-called Cole and Ogden memos that set out guardrails for federal prosecution of cannabis and allowed legalized marijuana to flourish in states across the U.S., according to two senior agency officials. U.S. attorneys in states where pot is legal will now be able prosecute cases where they see fit, according to the officials, who requested anonymity discussing internal policy.
Shares of pot companies plunged as news of the policy change surfaced, though many began to rebound after investors weighed the potential impact.
The change comes at a high point for the weed industry. California, the biggest U.S. state and sixth-largest economy in the world, launched its legal marketplace on Jan. 1. Sales in California alone are expected to reach $3.7 billion in 2018, according to estimates from BDS Analytics.
Seven other states and the District of Columbia have also legalized cannabis for adult use. Twenty-one additional states have voted to allow the plant to be used for medicinal purposes. The market is expected to skyrocket from $6 billion in 2016 to $50 billion by 2026, according to Cowen & Co.
Sessions, a Republican from Alabama, has long been opposed to marijuana, equating it with heroin. But this is the first action he’s taken that deviates significantly from the Obama administration. Many in the industry said the news is unsurprising but disappointing.
“While dismantling the industry will prove impossible, the move by Sessions will sow more seeds of uncertainty in an industry that already has its fair share of risks and unknowns,” said Chris Walsh, vice president of Marijuana Business Daily. “Businesses could be in for a bumpy ride amid this uncertainty, and we certainly could see some types of regional crackdowns or delays in upcoming medical or recreational cannabis markets.”
Shares Plummet
The Bloomberg Intelligence Global Cannabis Competitive Peers Index dropped as much as 24 percent after the Associated Press first reported the Justice Department plan. Most companies in that group are small. Still, there are a few big names that could be hit by the changing policy.
Constellation Brands Inc., which sells Corona beer and Svedka vodka in the U.S., got involved in the cannabis industry in October when it acquired a minority investment in Canopy Growth, a Canadian marijuana company. Scotts Miracle-Gro Co. has also made its way into the Green Rush. It fell as much as 5.7 percent after the news, the biggest intraday drop since May.
A tightening of enforcement also would be felt in Canada, where the cannabis industry has blossomed. Ontario’s Canopy Growth fell as much as 19 percent to C$29.06 in Toronto, while Aphria Inc. plunged as much as 23 percent to C$16.59. ETFMG Alternative Harvest ETF, the first pure-play pot ETF to be listed in the U.S., dropped as much as 9.7 percent, the biggest intraday decline since May.
Fear and Doubt
Sessions’s policy may cause investors to think twice before putting their money into the Green Rush, according to Adrian Sedlin, founder of Canndescent, a marijuana cultivation and branded-flower company.
“Fear, uncertainty and doubt will rip through our industry like a California wildfire because of this,” he said. “Whatever happens longterm, this will retard and limit capital flows into the industry for the foreseeable future.”
The move is likely to sow confusion among consumers and state officials, and may spark a backlash if state-approved retailers are prosecuted. Sixty-four percent of the U.S. population now wants to make pot legal, according to a Gallup poll released in October.
But it’s too late to stop the industry from growing, said Laura Bianchi, a partner and director of cannabis, business and corporate transactions and estate planning at Rose Law Group in Scottsdale, Arizona.
“To undo this industry would be like closing Pandora’s box once it’s been opened,” she said. “It would be a Herculean effort that would undermine another Republican cornerstone, which is the importance of states’ rights.”
Senators React
Senator Cory Gardner, a Republican from Colorado, where marijuana is legal, said in a tweet that Sessions’s move contradicts what he told the senator before his confirmation.
“I am prepared to take all steps necessary, including holding DOJ nominees, until the Attorney General lives up to the commitment he made to me,” Gardner said.
Senator Kirsten Gillibrand, a New York Democrat, said Sessions’s actions are an affront to medical patients who need to use the plant as medicine.
“Parents should be able to give their sick kids the medicine they need without having to fear that they will be prosecuted,” she said in a statement. “This is about public health, and it’s about reforming our broken criminal justice system that throws too many minorities in prison for completely nonviolent offenses.”
Still, the federal policy change may not actually hurt business much at all. Entrepreneurs starting marijuana businesses have already been working under risky circumstances. The plant has remained federally illegal, meaning most large companies -- including banks -- have shied away. Instead, the business has relied on state regulators, many of whom previously said they would defend the industry through any federal crackdown.
“We’re not overly concerned that a change in DOJ policy around cannabis will be meaningfully disruptive to legal adult use cannabis states, given the vocal support offered by these state-level AG’s,” said Vivien Azer, a Cowen & Co. analyst who covers the industry.
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