Cannabis Industry Faces Legal and Financial Challenges
Anthony Coniglio and Dan Ahrens Discuss Cannabis Industry’s Path Forward on “Trade to Black” Podcast.
- Anthony Coniglio sees lawsuit dismissal as a path to higher courts.
- Anthony Coniglio stresses the need for clear IRS rules in the cannabis sector.
- Dan Ahrens highlights state actions like Ohio’s and Pennsylvania’s in driving market growth
In yesterday’s episode of the “Trade to Black” podcast we had special guests Anthony Coniglio, CEO of NewLake Capital (OTCQX:NLCP) and Dan Ahrens. The conversation discussed a complex situation where strategic litigation, state-level advancements, and financial regulations are shaping the future of cannabis stocks and the broader market.
The dismissal of a lawsuit by major marijuana companies aiming to block government prohibition enforcement is a notable development. While the initial reaction may have been disappointment, industry leaders view this as a strategic step towards higher courts. Anthony Coniglio, CEO of NewLake Capital, explains, “Many of the folks that brought the suit explained that it was designed to get to the Supreme Court. It was actually designed to fail at some point along the way so that it could make its way through the appellate process and ultimately get to the Supreme Court.”
This strategic litigation underscores a deliberate effort to challenge and potentially overturn outdated precedents, setting the stage for more favorable federal regulations. The recognition by the federal court that plaintiffs have standing to bring the suit further strengthens the industry’s position. Coniglio notes, “A real obstacle for the plaintiffs here would have been if the judge would have said that they have no standing…but actually the judge in the ruling…states that he does believe that they do indeed have standing.”
The financial scenario for cannabis companies remains challenging, particularly with the IRS reaffirming that cannabis businesses cannot claim normal business deductions. This is due to marijuana’s classification as a Schedule I substance under the Controlled Substances Act (CSA), which deems it to have no medical use and a high potential for abuse. Coniglio emphasizes the need for clarity, “Having the IRS come out and say exactly what they’re going to do will be really important for investors because it will allow them to calculate what the liability will be.”
The potential rescheduling of cannabis to Schedule III would significantly reduce these financial burdens, allowing for standard business deductions and fostering a more stable financial environment. However, the exact implementation and timing remain uncertain, with industry leaders calling for clear and fair guidelines from the IRS.
State-level developments continue to drive cannabis industry growth. Ohio’s impending start of adult-use sales and Pennsylvania’s expected movement towards legalization are critical. Dan Ahrens from AdvisorShares highlights the influence of state actions, “Ohio pressures them a little bit…because they’re going to have that border business going to Ohio. Pennsylvania is coming.” These state-level advancements are crucial for the overall market, contributing to increased acceptance and normalization of cannabis use. The progress in Ohio and Pennsylvania exemplifies how regional markets can catalyze broader industry growth and influence neighboring states.
Investor sentiment in the cannabis industry is highly volatile, driven by regulatory news and market reactions. Recent sell-offs, partly due to misunderstandings about legal and regulatory announcements, highlight the importance of informed investor education. Ahrens stresses the significance of a focused investment strategy, “Our fund is very, very top heavy…And it’s top five holdings, top 10 holdings…There’s some stuff at the bottom that might have a little more torque, might have a little more upside.” Long-term investors are encouraged to focus on fundamental strengths and growth prospects, tuning out short-term volatility and headline-driven market fluctuations. The overall outlook remains positive, with anticipated regulatory advancements and state-level expansions providing a solid foundation for future growth.
The potential rescheduling of cannabis from Schedule I to Schedule III is a critical focal point for the industry. While this move would significantly alleviate financial and operational burdens, complete descheduling remains a distant goal. Coniglio remains cautiously optimistic, “I think it takes a fair bit of time. I think it’s going to take a lot of research and a lot of normalization before we actually get descheduling.”
The Supreme Court decision overturning the Chevron deference, which allowed federal agencies significant power to interpret laws, adds another layer of complexity. Coniglio elaborates, “Just about every business in America has a federal agency that oversees that business and has some rulings out there that are guiding that business…It should be the courts that should arbitrate what the law is.” This decision could impact the cannabis industry’s regulatory framework, potentially shifting more interpretative power to the courts and away from federal agencies. However, the immediate effects on cannabis rescheduling remain uncertain.
The cannabis industry faces legal battles, state-level progress, financial challenges, and potential federal rescheduling. Staying informed and adaptable is crucial for long-term growth and strategic opportunities. Industry leaders emphasize the importance of clarity, strategic litigation, and informed investment strategies.
