With over 60% of all Americans living in states where marijuana has some measure of legality, the cannabis industry is booming. Whether that legality is for medical or recreational use, companies in 28 U.S. states and the District of Columbia have sprung up to produce a wide variety of products. The raw plant value holds appeal for investors, but the real money is in value-added products such as cannabinoid extracts, cannabis oil, edibles, and waxes. Overall, the cannabis industry brings in approximately $7 billion annually and is expected to grow to at least $50 billion in annual sales by the year 2026, according to several financial analyses.
Investing in this booming industry seems like a smart move, but there are substantial challenges. The Financial Industry Regulatory Authority (FINRA), the primary organization that governs Wall Street trading, has not allowed any IPO filings from marijuana companies to date. Any cannabis company that trades stocks does so from reverse mergers. Eventually, it is expected that FINRA will allow IPOs from these companies. Until then, investing in cannabis-based businesses is incredibly risky.
Another risk associated with marijuana stock investments is that the companies behind the stocks are, in general, losing money despite the rising sales. Because these businesses do not have access to banking services and are ineligible for tax deductions, most companies struggle to show profit. Only a handful of companies currently offer any sort of publicly-traded stock, and the inexperience of these firms in the marijuana industry means that they may not be able to perform over the long term.
Finally, the U.S. Congress may play an important role in future marijuana stock investments. The push for rescheduling marijuana to a DEA Schedule 2 drug is gaining steam, but financial analysts suggest that this may backfire when it comes to investments. By rescheduling the drug, the U.S. Food and Drug Administration would become the agency responsible for all aspects of marketing, manufacturing, processing, and packaging of cannabis products. Regulatory hurdles, production oversight, and the expense of clinical trials mandated by the FDA would dramatically eat into any business operation. As a result, smaller companies may not be able to sustain their business. Only the larger, more established companies and industry consolidation would have any chance at showing profitability.