Jeff Sessions has fired the first shot in his long-awaited crackdown on marijuana

— and some investors see it as an opportunity

by Jeremy Berke

The Justice Department on Wednesday fired its long-awaited opening shot at the cannabis industry.

Attorney General Jeff Sessions has announced that he will rescind  the Cole Memorandum, an Obama-era guidance that directed the Justice Department to place a low priority on enforcing federal law in states where marijuana has been legalized. 

The move has lawmakers on both sides of the aisle scrambling to figure out what the change means for the eight states, including California, that have legalized the plant for adult use, as well as the 29 states where medical cannabis is legally prescribed to patients.

Sen. Bernie Sanders of Vermont and Sen. Cory Gardner, a Republican from Colorado, both voiced their opposition to the announcement, and public cannabis companies saw their stocks nosedive on Thursday morning.

But many investors and entrepreneurs who have years of experience operating in the cannabis industry were unperturbed.

"When there's complexity, when there's chaos, when there's uncertainty, that's when the people who are really good at doing what they are doing stand to make really strong gains," Micah Tapman, a managing director at the Colorado-based Canopy Accelerator, which focuses on early-stage investments in the cannabis industry, told Business Insider. 

What Sessions' move actually does, and doesn't do

Sessions is a longtime opponent of cannabis — he once joked in 1986 that the Klu Klux Klan was "O.K. until I found out they smoked pot". The Attorney General has dropped hints that he would order the Justice Department to uphold federal law — which considers cannabis an illegal, Schedule I substance — and crack down on the nascent industry since his confirmation last year. But many in the industry have been waiting for Sessions to start a fight over the expansion of cannabis since well before he took office. 

The Cole Memo, which Sessions rescinded on Thursday, had been in place since 2013. It instructed the Justice Department to leave cannabis-related businesses and organizations alone in states that have legalized the drug, provided the businesses avoid selling cannabis to minors, pay proper taxes, and avoid diverting cannabis to the black market. The new directive lets federal prosecutors decide whether and how aggressively to enforce federal drug laws in states where cannabis is legal for adults.

Some lawmakers in those states say the change simply creates too much uncertainty. 

"The Justice Department's new directive leaves the legal status of cannabis up to 93 US Attorneys," Rep. Jared Polis, a Colorado Democrat who's seeking to become the governor of his home state in 2018, said in a call with reporters. "Whatever side of the bed they wake up on, that's what happens with cannabis." 

On the same call, Rep. Dana Rohrabacher, a California Republican, said he thinks Sessions has "forgotten state's rights, and forgotten the Tenth Amendment". 

"Sessions is entitled to his opinion on cannabis, but he’s not entitled to weaponize his regressive ideas about marijuana against seriously ill Americans, like me, who rely on cannabis as a medicine and that’s exactly what he did today," Rohrabacher added. 

Sessions' move was cheered, however, by anti-cannabis activists including the advocacy group Smarter Approaches to Marijuana.

"The green rush from Silicon Valley to Wall Street will be stymied by this memo," Kevin Sabet, the group's CEO, said in a call with reporters. He added that he thinks the Justice Department's new position will "dry up institutional investing in the industry," and  hopes it will scare away investors who are only "in it for the money."

On that point, Sabet might actually agree with some investors within the cannabis industry. 

Investors see an opportunity in chaos

Krista Whitley is the CEO of Nevada-based Altitude Products, a company that sells accoutrements for cannabis consumers. She said she's seen a "cooling off" of high-net worth individual investors looking to jump into the cannabis industry in the few days since Sessions' announcement.

The move "spooked several investors who had considered dipping their toes in," Whitley said. "That’s been the immediate effect that I have certainly seen."

But investors who have operated in the industry for a while and are savvy to the regulations around cannabis see an opportunity.

"To me, this move by Sessions is actually a good thing," Canopy Accelerator's Tapman said. "It keeps valuations down, gives me good deals, and eliminates relatively unfocused short-term investors."

Tapman reasons that instead of going to high-net worth individuals who know little about cannabis, startups that need funding will turn to industry insiders like him. And his group will put the companies through a more rigorous due-diligence process, which will in turn push valuations down. 

Tapman does expect Sessions' move to hurt plant-touching businesses, like cultivators and dispensaries, and set federal cannabis reform back a number of years. But he anticipates that enough smart, hard-working people in the industry will survive until a new administration, or at least a new attorney general, takes over.

"The reality is, we're not going to see cannabis legalized under Trump's administration," Tapman said. "But the key to surviving is to do your research, be agile, and be thoughtful with how you conduct your business."

It's worth noting that repeal of the Cole Memo doesn't change cannabis's legal status at the federal level — it just adds another layer of complexity to an already high-risk industry. Institutional investors like major banks and asset managers in the US weren't investing in the cannabis industry much before, anyway, since it's always been federally illegal. 

Morgan Paxhia, a founder and managing director at Poseidon Asset Management, a cannabis-focused investment firm, said Sessions' move just takes the industry landscape back to where it was prior to 2013, when the Cole Memo was written.

"We have been officially investing in the cannabis industry for over four years," Paxhia said. "In the first half of the first year, we were without the Cole Memo."

Andrew Kline, a former federal prosecutor who now heads the National Association of Cannabis Businesses, a self-regulatory organization for the industry, suggested that cannabis businesses clamp down on complying with state regulations. 

"You have to be diligent, and you have to be willing and able to go above and beyond what state laws require," Kline said. Businesses hoping to avoiding prosecution should show regulators that they really care about adhering to both state and local regulations, he added.

Cannabis businesses that comply with state laws still likely won't get prosecuted — it's those that sell to minors or have some of their supply diverted to the black market that open themselves up to federal interference. 

Lawmakers on both sides of the aisle are fighting back 

Lawmakers are vowing to fight Sessions' move in order to protect an industry that could provide thousands of jobs and billions in tax revenue in states where cannabis is legal. In California alone, the state is predicted to rake in $1.4 billion in cannabis-generated tax by 2021

Sen. Gardner — who voted to confirm Sessions last year — has vowed to withhold Justice Department nominees until Sessions backs off of state-legal cannabis. Reps. Polis of Colorado, Rohrabacher of California, and Blumenauer of Oregon are urging both parties to support an amendment on the House's next budget bill that prohibits the Justice Department from spending money on enforcing federal law against medicinal cannabis.

The bipartisan group of lawmakers has public opinion on their side. Approximately 51% of Republicans and 64% of Americans overall support cannabis legalization, according to a recent Gallup poll.

"Ending the Cole Memo will simply mobilize those of us who support cannabis and support state's rights," Rohrabacher said. "Jeff [Sessions] is representing a mindset from the 1950's."

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