On Jan. 4, U.S Attorney General Jeff Sessions rescinded the Cole Memo, a 2013 directive from former President Barack Obama’s administration that allowed states to legalize marijuana with minimal federal interference. Sessions made this announcement just four days after California's recreational cannabis industry became legal.
The move gives the green light to federal law enforcement to crack down on states with marijuana laws on the books. And while California is worried about what it all means for a legal recreational industry that just barely got its wings, Canadian cannabis companies immediately felt the effects of the announcement.
The Cole Memo & Its Reversal
The Cole Memo was named after its author, former Deputy Attorney General James M. Cole. It indicated that the federal government would leave it to the individual states to police their marijuana industries. The U.S. government would only intervene if it was clear a state was:
- Selling cannabis to youths.
- Letting marijuana end up in the hands of criminal gangs and cartels.
- Distributing cannabis to states where it’s not legal.
Because of the Cole Memo reversal, federal prosecutors may now use "previously established prosecutorial principles" to go after cannabis users and marijuana businesses, including making decisions about how aggressively to enforce federal law. This could make it more difficult for cannabis businesses to open and operate across the United States.
How Does Sessions’ Actions Affect the Canadian Cannabis Industry?
It's too early to know what the full impact of Sessions' decision will be, but it certainly affects all Canadian cannabis companies with direct or indirect U.S. operations. Canadian cannabis producers won’t be able to conduct business safely across the border, be it making distribution deals or establishing production facilities.
Medreleaf, Canada's first certified producer of medical cannabis, must have heard Sessions loud and clear because it didn’t hesitate before issuing an immediate statement. In it, the company comments that changes to the enforcement of United States federal laws on marijuana won’t affect the company's business, and Medreleaf doesn’t intend to engage in any direct, indirect or ancillary involvement in the U.S. cannabis industry until it’s federally legal to do so.
Ripples Felt in the Canadian Stock Market
The TMX Group—operator of the Toronto Stock Exchange—warned licensed producers (LPs) in October 2017 that cross-border marijuana companies with activities that violate U.S. federal law could undergo a delisting review because U.S. federal law takes precedence over that of individual states.
Canadian Securities Exchange took a more lax approach, only requiring that marijuana companies disclose the risks associated with its U.S. activities to investors.
Meanwhile, the Canadian Securities Administrators (CSA) is contemplating a change in their previous policy concerning Canadian companies with U.S. cannabis operations. Because of the Cole Memo, it previously counselled companies to simply disclose any risks, along the lines of the Canadian Securities Exchange’s policy. In a CSA staff notice from October, it indicated that the policy might be re-evaluated if there was a change in the federal government’s approach. Change now appears imminent, although the implications are uncertain.
Sessions' announcement also caused same-day fluctuations to Canadian cannabis-industry stock prices:
- Canopy Growth’s share price (TSX:WEED) tumbled by as much as 19% before regaining some footing to close at 10% down.
- Aphria Inc. (TSX:APH), which has some U.S. exposure, saw its stock price plummet as much as 22.6% the day of the announcement, but eventually closed down 13.79%.
- MedReleaf (NASDAQOTH:MEDFF), despite its level-headed press release, saw investors pull back by as much a 21%.
The hope that Canada could someday export its product to the U.S. or consider opening commercial grow farms there is off the table for now.
Will the Canadian Cannabis Industry See Any Benefits?
Experts believe that if marijuana continues to be illegal at the federal level in the U.S., it will benefit the Canadian marijuana industry as this will suppress the rise of any large U.S. cannabis companies to challenge Canadian marijuana producers as they expand globally. It allows Canada to pursue these international opportunities with relatively little competition.
Cam Battley, the executive vice president of Edmonton-based Aurora Cannabis Inc. agrees that this will drive additional U.S. investment and investors north of the border.
For LPs like Aurora and other companies in the Canadian cannabis industry, there are many other options to expand existing operations around the world where large-cap Canadian cannabis companies will have little competition—at least for the foreseeable future.
Photo credit: thierry ehrmann