The cannabis industry in the United States finds itself at a critical crossroads. While legislative progress continues to inch forward and the market matures, fundamental challenges like high taxation, overleveraged businesses, and investor skepticism threaten to hinder growth. As the industry gathers for MJBizCon, it’s an opportune moment to discuss the pressing realities and untapped potential of cannabis in the U.S.
💰 A Market Running on Debt
As of October 2024, the U.S. cannabis industry has raised approximately $890M in capital year-to-date, an eye-opening 98% of which was debt. Even more striking, 82% of this debt was allocated to refinancing existing obligations, underscoring how businesses are struggling to manage their financial health.
Debt has been the dominant form of financing since 2020, making up over half of all capital raises annually, except for a dip to 47% in 2021. But why this reliance on debt?
The promise of legislative and regulatory reform—such as rescheduling via the S3 recommendation or the SAFER Banking Act—has ironically created a locked equity market. Investors, burned by delays and unmet expectations, have adopted a cautious “believe it when we see it” approach. Companies, fearing equity raises at undervalued prices, are left with little choice but to lean on debt, perpetuating a cycle of financial instability.
Original published by Peter Su here. Source by http://viridianca.com/
High Taxes: The Silent Killer of the Legal Market
Taxes are one of the largest barriers to the success of the legal cannabis market. While states celebrate billions in tax revenues, these gains come at the cost of a thriving illicit market, where prices remain significantly lower due to the absence of taxation.
For instance:
- In California, consumers face a 15% excise tax, local sales taxes, and cultivation taxes, often pushing total tax rates beyond 30%.
- Colorado adds a 15% excise tax, a 2.9% state sales tax, and local taxes that can exceed 5%.
- Illinois imposes tax rates ranging from 10% to 25%, depending on THC potency, making it one of the most expensive states for legal cannabis.
These tax burdens discourage consumers from participating in the legal market and create significant financial strain for businesses, especially smaller operators who struggle to compete with well-capitalized corporations.
What Happens if Federal Legalization Adds Another Tax?
Some proponents argue that federal legalization, combined with taxation, would streamline regulations and create uniformity. However, layering federal taxes on top of existing state and local taxes risks further damaging an already fragile industry. Without comprehensive tax reform that prioritizes market competitiveness, federal legalization could inadvertently drive consumers and businesses deeper into illicit or gray markets.
Investor Sentiment: The Equity Conundrum
The anticipation of legislative reform, like the potential rescheduling of cannabis or SAFER Banking, has frozen equity markets. Investors don’t want to bet on promises, and companies don’t want to issue equity at undervalued prices, fearing future dilution if legislative breakthroughs raise valuations.
This dynamic has created an unusual paradox: while reforms like S3 are intended to support the industry, their slow and uncertain progress is causing financial gridlock. The recent disappointment in Florida, which failed to catalyze market growth as expected, is a prime example of why investors remain cautious.
What’s Next for the U.S. Cannabis Market?
1. Tax Reform Is Essential
For the legal market to thrive, federal and state governments must work together to create a tax framework that balances public revenue with market viability. Lowering tax rates could drive more consumers into the legal market, increase compliance, and reduce the dominance of illicit sales.
2. Unlocking Equity Markets
Investors and companies must prepare for a future where equity capital becomes a viable option again. Transparent communication, robust financial planning, and trust-building will be key to attracting equity investment when the time is right.
3. Federal Legalization Must Be Comprehensive
Federal legalization should not focus solely on rescheduling or banking reforms. A holistic approach is needed, addressing issues like tax uniformity, access to traditional financial services, and regulatory harmonization across states.
4. The Role of Debt in Building Resilience
While reliance on debt capital isn’t ideal, it has kept the industry afloat during challenging times. Companies must use debt strategically, prioritizing investments that improve efficiency, scale operations, and strengthen long-term sustainability.
An Industry Ready for Change
As we prepared a “Ask me anything” by Rachel Wright (VERDANT strategies) at MJBizCon, it’s clear that the cannabis industry is at a tipping point. With $890M raised year-to-date and most of it in debt, businesses must navigate a complex financial landscape while remaining ready to seize opportunities as legislative progress materializes.
The promise of cannabis remains strong, but realizing that promise requires collective action, strategic planning, and above all, a commitment to addressing the systemic challenges holding the industry back.
