In this week’s Trade To Black Podcast, Shadd Dales interviewed AdvisorShares Pure US Cannabis ETF (NYSEARCA: MSOS) Portfolio Manager Dan Ahrens, who was participating in the Benzinga Cannabis Capital Conference in Miami. After reaching historic highs in Q1 2021 following a Democrat Senate run-off election sweep in Georgia, the ETF has fallen on hard times as legislative gridlock and challenging industry factors have caused MSOS to decline precipitously. Mr. Ahrens opines on the importance of SAFE Banking for the cannabis industry, among other things.
Undaunted, Dan Ahrens remains as upbeat as ever about the sector’s long term prospects for success. Despite the moribund price action pushing prices to all-time lows, Mr. Ahrens remains “bullish as hell” as the overall fundamentals are not reflected in the market equity value. Several reasons are at fault for the disconnect.
MSOS List On Tier-2 Exchanges
All U.S. domiciled cannabis companies list on junior exchanges, which is a market generally reserved for shares of smaller or younger companies. To date, the Tier-1 exchanges have not allowed listing on their exchanges due the federal illegality of cannabis and designation as a Schedule 1 narcotic. This distinction matters, because many Funds, Index Funds and investment banks are prohibited from taking positions in equity residing on OTC or Canadian Securities Exchanges.
IRS Code 280e
Under the federal Controlled Substances Act, cannabis is classified as a Schedule 1 illegal drug with no medical uses, on par with heroin and LSD. As long as cannabis remains a Schedule 1/2 drug, IRS Code 280e will apply. This code restricts businesses that deal with Schedule 1/2 drugs from deducting many business expenses that regular businesses would be eligible to deduct. Therefore, it sharply increases the effective tax rate payable by cannabis-touching businesses, thereby reducing earnings potential.
Federal Regulation Moving At Glacial Speed
Stock prices remain weak as investors grow impatient with the slow pace of federal cannabis legalization efforts. The pace of regulatory reform has not met expectation since Joe Biden took office along with Chuck Schumer as Senate Majority Leader. Just recently, it was revealed that Mr. Schumer’s much ballyhooed Cannabis Administration and Opportunity Act won’t be introduced until August at the earliest. The original expectation was that Schumer’s legislation would go up for a vote in April. Chuck Schumer has also scuttled SAFE Banking reform to date, despite broad bipartisan support.
Dan Ahrens expects that once SAFE Banking is enacted—and he expects that to happen this year—the dominos will be set in motion for MSOS to list on major Tier-1 Exchanges. As he notes, the exchanges don’t need political permission to do so
This article was originally published on The Dales Report and appears here with permission.
