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Cannabis' Federal Legal Status Is Not a Total Buzzkill

The industry still has significant growth potential.

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Karen Wallace: Hi, I'm Karen Wallace from Morningstar. There's a lot of talk about cannabis these days. U.S. Senate Democrats recently released a discussion draft of a bill that would deschedule cannabis on a federal level and recognize states' individual cannabis laws. Though cannabis is legal or set to become legal for both recreational and medical use in 19 states and medical use only in another 17 states, it's still illegal on a federal level. And that uncertainty has clouded this growing industry. I'm here with Kris Inton. He's an equity research strategist for ESG at Morningstar. Kris, what difference would it make if cannabis were no longer illegal on a federal level?

Kristoffer Inton: The removal of federal prohibition would be a massive boon to the industry, especially financially. First, at present, any industry that does business with or serves the cannabis industry could be considered aiding and abetting criminal activity. The ability to access financial services is one of the most notable limitations. U.S. cannabis companies are neither listed on major U.S. stock exchanges nor fully served by banks. So, change to federal law would open these up for the industry. Second, due to IRS laws, U.S. cannabis companies pay very high tax rates, as they're technically a federally illegal business. The removal of prohibition would bring rates into the 20% territory that every other industry pays. And then lastly, scientific research would be easier to conduct, including any studies on efficacy, potency, and safety. And this can help remove a lot of the misconceptions that have lingered.

Karen Wallace does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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