As state legalization brought Cannabis into the mainstream, investor enthusiasm and dealmaking momentum surged as investors and dealmakers sought first-mover advantages. Yet Wall Street and debt markets remain hurdles to securing financing as long as federal prohibition remains.
2024 may prove less hospitable than prior election years to new federal cannabis legislation and banking reform measures, though advocates hope for some advancement on SAFER Banking Act legislation.
Trends Affecting the Industry
As the cannabis industry develops, key trends will play a pivotal role in shaping its future. Consumers are seeking more customized and authentic experiences when purchasing cannabis-related products; from discovering rare strains to purchasing locally sourced goodies. These changes in consumption methods and preferences highlight the necessity of tailor-made product lines that meet individual consumers’ individual requirements.
As state legalization brought cannabis into the mainstream commercial arena, investor enthusiasm and dealmaking momentum increased to gain first-mover advantages. Yet despite venture capital inflows skyrocketing, federal barriers limiting Wall Street and debt markets remain significant barriers for most Cannabis businesses.
In the US Senate, the SAFE Banking Act has been reintroduced, providing banking access for marijuana-related businesses by protecting financial institutions that serve those industries from federal prosecution for doing business activities that still contravene federal law. Palmquest anticipates this bill will move through both chambers quickly; should it pass, Palmquest expects an influx of banks, credit unions, insurers and payment providers entering this sector of the market.
Regulatory Changes
Industry players are experiencing unprecedented growth, outstanding technological developments and essential legislative shifts – all which are driving product innovations while changing consumer engagement patterns and consumption patterns.
2024 will see more companies prioritizing operations that are environmentally conscious, not only to reduce utility costs but also as an opportunity for brand differentiation in an already crowded market. Not only will brands benefit from being green, but it may help differentiate their offerings among a more environmental conscious consumer base and foster customer loyalty through increased brand recognition and consumer satisfaction.
On the legislative front, there are cautious hopes for progress on cannabis banking legislation this year. The SAFE Banking Act has already cleared a Senate committee, providing cannabis companies access to financial services that may significantly expand access to capital markets. Rescheduling could also finally take place this year and allow cannabis businesses to take standard business deductions which would significantly boost profits.
M&A
Federal legalization promises to give cannabis companies an enormous boost, creating a wave of liquidity that could enable businesses to refinance debt or raise new capital more easily and gain greater access to public listings on major U.S. stock exchanges that offer investors increased visibility into the sector’s potential growth potential.
M&A transactions will continue to drive industry consolidation as businesses seek economies of scale and diversify their product offerings. M&A activity may also be affected by an increasing trend towards personalized cannabis products that cater specifically to consumers’ specific needs and preferences.
Financial institutions will soon receive guidance regarding their duties to serve cannabis-related businesses and service providers. This guidance is critical for the industry’s continued expansion.
Liquidity
Businesses operating within the cannabis industry are used to constant change, yet 2024 will present more significant adjustments than usual. It began promisingly as new markets legalized, a Senate panel marked up SAFE Banking Act legislation and Health and Human Services recommended rescheduling marijuana.
However, as 2019 continues, prospects of progress have dimmed considerably. House leadership changes–such as replacing former Speaker Kevin McCarthy who supported marijuana legislation with one who opposes it–has only compounded matters further.
Under uncertainty, successful companies must remain flexible and focused on cash flow management. An infusion of liquidity may allow debts to be refinanced and equity raising to resume, saving some businesses that wouldn’t otherwise survive; while larger firms can use it as an opportunity to bolster their balance sheets and enhance financial health of stocks. Companies that remain cash positive are better equipped to withstand market fluctuations as well as any possible regulatory changes.