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Budding Business, Regulatory Jungle

By Oliver Bodmer, Senior Product Manager in the Financial Information business unit of SIX

More and more countries are legalizing marijuana for medical and even recreational use. The number of marijuana-related businesses is growing exponentially. However, the regulatory situation remains confusing for the time being.

Oliver Bodmer
Oliver Bodmer

Since the late 1970s, coffee shops in the Netherlands were places of yearning for marijuana consumers. Possession of small quantities of marijuana was tolerated, but the dried buds of cannabis plants were never entirely legalized. That’s why Amsterdam had to cede its status as a marijuana mecca by early 2018, when Canada, following Uruguay in 2017, became the first industrialized nation to completely legalize the cultivation and sale of cannabis. The legalization move by the Canadian government was aimed at promoting safer marijuana use and more effective youth protection, as well as opening a new business and investment sector for the economy.

Hopes in the latter aspiration, at least, are justified. The market for marijuana-related businesses (MRBs) possesses huge growth potential. Around 30 more countries in addition to Uruguay and Canada have since legalized marijuana at least for medical purposes. MRBs have accounted for 3% of all initial public offerings (IPOs) in those countries thus far in 2019. Annual worldwide sales revenue of MRBs is projected to climb to above USD 60 billion by 2024.

Gold Mine or Reputation Trap?

Marijuana seems to be losing its stigma as a gateway drug. However, investing in this market isn’t a no-brainer given the heterogeneous regulatory landscape worldwide, which looks set to stay jumbled for a long time to come. What’s legal on one side of the globe can be punishable under criminal law on the other side of the world. Take the sub-market for cannabidiols (CBDs) as an example. CBD products contain only a very small concentration of psychoactive tetrahydrocannabinol (THC). They have been sold freely in Switzerland since 2011, whereas in Texas their sale is restricted to epilepsy patients.

Particularly in the US market, the legal landscape is exceptionally complicated. Drug offenses in the USA fall under the legislative jurisdiction of the 50 individual states. State laws, though, can deviate from US federal law, which banks are heavily subject to.

MRB Securities Watchlist: 120,000 Financial Instruments Affected

Some investors wish to avoid investing in marijuana-related businesses (MRBs) altogether, or at least want to be able to make risk-based decisions on investing in such companies. Not just in view of regulatory uncertainty, but also for reputation reasons. But since MRBs operate in a wide array of sectors ranging from research and cultivation to transport and sales (see graphic), it is hard for banks to maintain an overview in the interest of their investor clients.

As a result, an MRB Securities Watchlist has become a critical tool in the banking arsenal, listing MRBs and their issued securities, as well as structured products and options based on those securities. The MRB Securities Watchlist of SIX currently identifies 120,000 MRB-linked securities.

A Fragmented Market

Cannabis is currently legal for medical use in 33 of 50 states. Among them are 11 states where it is completely legalized also for recreational use for adults over the age of 21. With the exception of Nebraska and South Dakota, the remaining states permit the use of low-THC marijuana and CBD products under certain circumstances. US federal law, however, still criminalizes the use, possession, cultivation, and sale of marijuana.

An investment requires careful consideration – inside and outside the USA. Even though marijuana has been legalized in a growing number of countries, it remains illegal in the vast majority of nations. Residents of those countries that outlaw cannabis who invest in MRBs run the risk of violating anti- money-laundering laws. The new MRB Securities Watchlist from SIX helps to assess this risk.