The potential rescheduling of cannabis may do little immediately to ease the path for cannabis companies to list on U.S. stock exchanges. But longer term the renewed investor interest and capital that a rejuvenated cannabis industry could attract post-rescheduling may force the major exchanges to re-think their policies that have prevented listings of U.S. operating companies to date.
“I think that from the standpoint of the major stock exchanges in the U.S. – NASDAQ and the New York Stock Exchange – rescheduling may not, as a technical matter, change what seems to be a policy of not listing plant-touching companies,” said attorney Seth Goldberg, partner at Duane Morris and co-lead of the law firm’s cannabis practice. “The policy of not listing cannabis operators and plant-touching companies really seems to be detached from the federal government’s policy of not taking any enforcement action with respect to cannabis companies that comply with state cannabis laws.”
David Feldman, founder and managing partner at Feldman Legal Advisors, also said that economic forces were more likely to bring change than any regulatory shift.
“There is no indication that the exchanges will change their approach to banning listings of plant-touching companies with the expected change to Schedule III, but one never knows,” said Feldman. “When Nasdaq allowed the first ancillary cannabis business to be listed back in late 2016, it was a surprise to all at the time.”
Historically, the NYSE and NASDAQ have been reluctant to list cannabis companies. Regardless of current listing policies, Goldberg noted that rescheduling could bring a financial boost to cannabis companies, which could, in turn, convince exchanges to give cannabis a second glance.
Thus far, only a few cannabis companies have been able to list on the NASDAQ, including Tilray (TLRY), Cronos Group (CRON), Canopy Growth (CGC) and Sundial Growers (SNDL), which listed as holding companies rather than as direct cannabis companies.
In Canada, where cannabis is federally legal, plant-touching companies are able to list on the Canadian Stock Exchange (CSE) or the Toronto Stock Exchange (TSX). Most multi-state operators in the U.S. are incorporated as Canadian companies in order to access that country’s exchanges.
OTC Markets is a smaller U.S.-based listing market that has allowed several MSOs to list, including Curaleaf Holdings (CURLF), Trulieve Holdings (TCNNF), Cresco Labs (CRLBF) and Verano Holdings (VRNOF). But even these companies originally listed on the CSE as the primary listing market.
Elimination of 280E tax restriction will raise valuations
“If there is rescheduling, there are going to be cannabis operators that will benefit from a different tax structure, more capital coming into the industry and companies growing, and maybe that combination of those things causes the exchanges to rethink their views on cannabis,” said Goldberg. “Presumably without the burden of 280E, cannabis company balance sheets start to look a little different and cannabis company valuations start to look a little different.”
Alongside the difficulty of securing funding, cannabis companies have also struggled with disproportionately high tax bills, thanks to Section 280E of the federal tax code, which bars businesses from deducting most business expenses when that business deals in a Schedule I narcotic. Removing that restriction would suddenly open cannabis companies to billions of dollars in tax relief in an industry where margins are persistently slim.
In recent months, MSO giants such as TerrAscend (TSNDF), Ascend Wellness Holdings (AAWH) and Trulieve have challenged 280E’s application to their own tax returns with Trulieve claiming it received $113 million in tax refunds. Regardless of whether or not their respective tax challenges prove successful, it remains that smaller companies are left waiting on the sidelines for a change in tax law.
Peter Sack, Co-CEO of investment firm Chicago Atlantic, said lifting the 280E restriction is an important change that “fundamentally changes the cash flow of companies of all sizes.”
Sack suggested that it would open up credit to a range of borrowers that couldn’t previously afford debt financing because companies would have higher valuations.
He said he thought it was unclear whether plant-touching companies would be able to list on U.S. exchanges. The reason IPOs haven’t been listing is because valuations are depressed, and greater valuations will allow companies to raise more capital and allow larger companies to buy smaller companies, Sack said.
SAFER Act could make it safer for exchanges too
Feldman said that the federal SAFER banking bill, which has struggled in Congress, could provide a clearer pathway for cannabis companies to list on exchanges.
“There is an effort underway to include protections for the exchanges in the SAFER banking bill that is being worked on in the Senate,” he said. “Various versions of that bill, however, have consistently failed to move much beyond committee, so there’s no particular reason to think things have necessarily changed much, especially now that we have entered the ‘silly season’ of presidential politics.”
Aside from companies being able to list, Feldman also said there would need to be some changes among trading firms and their own policies about cannabis stocks.
“A more interesting challenge is convincing stock brokerage and clearing firms to allow folks to keep cannabis stocks in their accounts and for the clearing firms to clear the trades. Most of these firms do not permit trading in cannabis stocks,” he said. “There is a possibility that more of these firms will dip their toe in the water following the change to Schedule III, but again we have not seen any indication of that as yet.”
A spokesperson from the NASDAQ, speaking on background, declined to definitively say whether or not rescheduling would change the exchange’s approach to cannabis companies.
“Whether a company’s activities are legal under federal law following rescheduling would depend on the facts and circumstances surrounding those activities and the details of what is done about rescheduling. But for most companies, rescheduling will have no impact, and they will still be operating in violation of federal law,” they said.
Spokespeople from the NYSE and OTC both declined to comment.
