In the seven years since Colorado legalized recreational cannabis, the industry has been on the upswing. Ten U.S. states and Canada followed suit and producers, retailers, and auxiliary businesses have exploded. But they’re still treading a tricky path.

During the first phase of legal cannabis, the vast majority of the companies operating in the space were small businesses, but as the industry continues to evolve, these businesses are scaling up. Their success is getting the attention of outside investors and the future is looking bright for the industry.

In Canada, recreational cannabis has been legal for one year. Prior to October of 2018, only licensed medical users could legally possess it. According to Statistics Canada, as of June 19, a mere five-and-a-half months later, the government had collected nearly $200 million in taxes in relation to cannabis products, and similar results have been seen in all states where its use is legal.

Prior to recreational legalization, investors had been hesitant to enter the cannabis industry, but that appears to be changing. In December of last year, the investment banking arm of the Royal Bank of Canada publicly stated that they planned to make some selective cannabis-related investments. The Bank of Montreal has done the same after one of the company’s financial analysts estimated that the cannabis industry could exceed $194 billion globally.

Canada comes in
According to Business Insider, sizable mergers and acquisitions are underway throughout the industry. Last August, Canopy Growth, a major public Canadian cannabis producer, received a $4 billion investment. In December, another producer called Cronos Group received a $1.8 billion investment from Altria. Many investors were hesitant to move into the cannabis industry due to a lack of clarity around how it would affect dealing with the United States government. As things progress, more investors are expected to move in.

Canadian companies have begun to lobby the Toronto Stock Exchange to allow them to invest in American cannabis companies. Currently, while cannabis has been made legal in some states, the U.S. government still considers it illegal at federal level. Because of this, the Toronto Stock Exchange has said that it will continue to prohibit any of its listed companies from violating U.S. law by selling cannabis products in the United States.

Major public producers like Canopy Growth would benefit substantially from access to the much larger and more lucrative American market by acquiring or investing in those companies. Canopy and others have been lobbying the TSX to change these policies but as of yet, without success.

The hemp effect
Despite this, efforts have been put into accessing the U.S. market without violating these regulations. The rules relate specifically to products containing THC. To side-step this, some Canadian companies have been exploring hemp products and hemp-derived CBD (cannabidiol).

In December of 2018, the United States Senate passed the Agriculture Improvement Act. One of the provisions in this legislation disconnected hemp and hemp seeds from the statutory definition of cannabis, removing them from the federal list of controlled substances. Now, hemp products can be grown anywhere in the United States. CBD can be derived from hemp. Recently, CBD has been a hot topic among cannabis investors and within the cannabis community. Because it contains no THC, hemp-derived CBD can be sold in the United States by companies listed on the Toronto Stock Exchange.

In April of this year, Canopy Growth made yet another move toward accessing the American cannabis market. In a groundbreaking deal, the first of its kind in the cannabis industry, the company entered into a conditional agreement to purchase American cannabis company Acreage Holdings for $3.4 billion, conditional on the federal legalization of cannabis in the United States. Now that this deal has been made, experts anticipate more companies to use this framework to expedite more cross-border mergers and acquisitions.

According to insiders, the agreement is structured so that Acreage Holdings receives $300 million upfront, and the rest when the condition is met. The details have not been made public so it’s not known if there is a time limit on the deal, or what would happen to the initial investment if the condition isn’t met. According to Business Insider, some analysts are calling this a $300 million bet on federal legalization.

Cross-border deals
Whatever happens, this deal has paved the way for a major cross-border merger and acquisition boom for the Canadian cannabis industry which is expected to bring in significant investors from pharmaceutical and tobacco companies.

On the American side, cannabis companies are prohibited from trading on American stock exchanges at all. This has triggered a flurry of tricky legal maneuvering. Private companies in the United States are acquiring public shell companies in Canada that are already trading on Canadian exchanges. This process – a reverse merger, or reverse takeover – enables American companies to quickly gain access to public investment.

American cannabis companies that go public in Canada via a reverse takeover still cannot access the Toronto Stock Exchange due to the regulations mentioned earlier, but the secondary Canadian Securities Exchange has no such regulation and therefore is accessible.

Despite the clear growth in this sector, many challenges still exist. Since the U.S. government considers cannabis a controlled substance, businesses are forced to deal in cash. A national bill called the SAFE Act that aims to help banks work with state-legal cannabis companies has been drafted but according to an article published in Forbes, little is known about the bill’s prospects for passing the Senate. Specifically, this bill would prohibit federal regulators from issuing consequences to a bank for working with cannabis companies that are operating within state law, and from discouraging lenders from working with those companies.

Banks and lawyers
A lack of access to financial services has been a significant challenge for cannabis companies in Canada as well. Because of their international dealings, banks have so far been hesitant to touch anything that might run afoul of United States federal law.

The tricky legal situation surrounding cannabis has created a great opportunity for one auxiliary cannabis industry in particular. With the existence of so many unexplored legal gray areas, cannabis industry lawyers are finding themselves with a lot of interesting work to do. As cannabis companies grow, merge, and bring in major investors, their legal teams are expected to navigate murky waters. As American cannabis companies operate contrary to federal law, lawyers are there to keep them on the right side of legal trouble. The cannabis industry has become a substantial source of employment for lawyers trying to sort out its complexities.

In the very short time since cannabis has been legalized, a small industry has burgeoned into a global powerhouse. A major international mergers-and-acquisitions boom is underway, and huge companies are making portentous decisions on the presumption that American federal legalization will happen.

Cannabis retailers, producers, and auxiliary companies are facing challenges that have never been faced before and navigating a legal situation unlike anything that’s ever happened except perhaps in those mad days of the 1920s.