On December 8, Congress faces a deadline on deciding whether or not to allow Jeff Sessions and the Department of Justice to spend money prosecuting violations of federal marijuana laws in states that have legalized medical marijuana. That’s when Congress will determine whether the Rohrabacher-Farr Act will be renewed by placing it in the next annual spending bill.
Last time around, earlier this fall, the House of Representatives heeded a request from the Attorney General to remove this provision from their version of the spending bill. It was, however, part of the Senate bill which was later adopted by the House in a temporary measure designed to fund the government through the rest of 2017. That authorization expires at the end of the year, and a new spending bill must be passed to fund the government through 2018.
In another move with impact on marijuana legalization in the states, the Justice Department will no longer issue guidance memos to set guidelines for federal prosecutors. The Obama administration’s “Cole Memo,” issued in 2013, was a guidance memo that instructed prosecutors to give medical marijuana prosecutions a low priority.
This change signals a change in policy by the Justice Department that will give federal prosecutors more discretion in how they address violations of federal law in states with legal marijuana markets.
Against this backdrop, another threat to the legal marijuana market is emerging—the dilution of shareholder value.
First, consider the risks faced by this emerging industry. The marijuana industry is illegal at the federal level, it can not take advantage of corporate income tax deductions, they have little or no access to banking services and cannot access traditional lines of credit.
All of this makes it difficult to raise capital.
The common remedy to this problem is to sell stock, often at a fixed price prior to releasing a prospectus to the public; this is known as a bought-deal offering. The result is a dilution of the value of existing shares held by investors. A firm may indeed turn a profit, but the share of the profit owed to an investor is reduced with each bought-deal offering.
This introduces a challenging dynamic to the market—as risk increases share value will decrease as firms try to raise capital to grow to meet demand.
Consider, then, the effect on the market from increases in risk due to a more hostile and active Department of Justice.
Justice Department prosecutions in medical marijuana states will not, initially, destroy or shut down the market. They would likely go after symbolic targets that help them build a case in the court of public opinion that the state-laws are being exploited, especially for out-of-state distribution. But it would enable the federal government to begin a war of attrition against the market, a war that would increase risk and further restrict the industry’s ability to raise capital for expansion.
This would create another problem for the industry, and for the cause of legalization overall. Increasing financial and legal pressure would make it more difficult for the industry to finance political and lobbying activity to protect existing markets and create new markets in the future.
Of course, such pressure from the Justice Department would also provide a further incentive for the legal marijuana industry to increase their political activity. But that’s just one possible outcome.
Mass arrests and forfeitures are not the only way Sessions and his allies can threaten the marijuana industry. They can also act in other ways to increase risk for investors in the legal marijuana market, and in doing so, not only slow down industry expansion but also restrict its ability to participate in the political process.
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