TORONTO — A move by the U.S. attorney general to quash an Obama-era policy that allowed legalized pot to flourish south of the border dealt a blow to marijuana stocks Thursday, but observers and industry players say the crackdown is a boon for the Canadian cannabis industry.
On Thursday, Jeff Sessions rescinded the 2013 Obama administration guidance that suggested the federal government would not intervene in U.S. states where the drug is legal, which has opened the door for several states to legalize pot for medical and recreational purposes.
In a new memo, President Donald Trump's top law enforcement official said he will instead let federal prosecutors where marijuana is legal decide how aggressively to enforce federal law, which still prohibits the drug.
Several marijuana stocks saw a double-digit pullback on the news, with Canada's biggest licensed producer Canopy Growth (TSX:WEED) down as much as 19 per cent before regaining lost ground by the end to close down nearly 10 per cent at $32.32. Marijuana producer Aphria Inc. (TSX:APH), which has some U.S. exposure, was down as much as 22.6 per cent but closed down 13.79 per cent at $18.50.
Echelon Wealth Partners analyst Russell Stanley said if marijuana continues to be illegal at the federal level, it will benefit Canada as this will suppress the rise of any large U.S. cannabis companies to challenge Canadian marijuana producers as they expand globally.
"It keeps the U.S. out of that game and it allows Canada to pursue these opportunities with relatively little competition," he said.
Under U.S. federal law it remains illegal to cultivate, distribute or possess the drug but the Obama administration guidance had seen more than two dozen states legalize medical marijuana, with California the latest state to legalize the recreational use of weed as of Jan. 1.
Cam Battley, the executive vice-president of Edmonton-based licensed marijuana producer Aurora Cannabis Inc. (TSX:ACB), called Sessions's stance "misguided public policy" that is counter to broader U.S. public opinion. However, he also said this will drive additional U.S. investment and investors north of the border.
"It cements the fact that we will not be seeing for the foreseeable future, well-capitalized U.S. competitors as we expand our operations around the world," said Battley. "And it just prolongs that unusual situation, where large-cap Canadian cannabis companies have the world to ourselves."
Eileen McMahon, chair of intellectual property and food and drug regulatory practices at Torys LLP, said the U.S. attorney general's stance will also create added complexity for Canadian cannabis companies that have direct or indirect U.S. operations.
The TMX Group, which operates the Toronto Stock Exchange and the TSX venture, warned in October that cross-border marijuana companies with activities that violate U.S. federal law could undergo a delisting review. TMX issued a staff notice saying that U.S. federal law takes precedence over state laws.
However, the alternative Canadian Securities Exchange took a more lax approach, requiring that marijuana companies disclose to investors risks associated with its U.S. activities — an approach that the Canadian Securities Administrators supported in its own guidance in October.
Canadian marijuana companies had largely handled the murky legal landscape by focusing on non-U.S. markets or by listing on the CSE, which helped the smaller exchange to hit record trading volumes and value last year.
Richard Carleton, the chief executive of the CSE, said Thursday that a shift in U.S. policy was a known risk and the exchange is not changing any of its policies.
However, he said the CSE has reached out to issuers with exposure to the U.S. cannabis industry to remind them to disclose their views on the impact of Thursday's announcement.
"It's way too early to know what the impact is going to be," Carleton said.