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Money News

If Cannabis is Illegal Under Federal Law, How Is It Legal to Invest In It?

March 28, 2018

2 min read

The cannabis industry is set to be a $57 billion giant by 2027, according to industry analysts. Yet, marijuana is still outlawed at the federal level, despite being legalized in several states.

How is it, then, that the industry has been allowed to take root? And how, as an investor, are you allowed to well, invest in it?

How can I legally invest in the business of cannabis?

Those who wish to legally invest in the business of cannabis have options. They can invest in companies that are registered in other countries (such as Canada), or invest in companies that don’t directly interact cannabis plants — they don’t grow, process, or distribute marijuana.

I’m confused. I thought marijuana was an illegal drug.

Marijuana is illegal at the federal level, as it’s a Schedule 1 controlled substance. But for many years, it’s existed in a sort of legal gray area in many states.

Using marijuana for medicinal purposes, for example, is legal in 29 states. In eight states (and Washington D.C.) it’s been legalized for recreational consumption. These state laws are at odds, however, with federal law.

Whether or not the federal government takes action against industries operating within and complying with these states laws has changed from administration to administration. Under President Obama, for example, federal law enforcement agencies were instructed not to interfere with the industry, given that state laws were being followed.

The Trump administration, on the other hand, reversed that policy.

So, companies in the U.S. working in the cannabis space are at risk of being fined or shut down as working with cannabis breaks federal law.

Why are many cannabis companies listed on Canadian exchanges?

While some publicly-traded cannabis firms are based in the U.S., they’ll list shares on international exchanges as a response to concerns about federal crackdowns or legal intervention. Many cannabis and cannabis-related companies list their shares on Canadian exchanges, for example, because Canada has announced plans to fully legalize marijuana.

As for publicly-traded domestic companies operating in the marijuana industry, many play a supporting role in the marijuana industry. Kush Bottles (ticker: KSHB), for example, is a U.S.-based company that makes storage containers for marijuana, but doesn’t produce or process it.

All of the above is very different from investing in the farming, growing, or distribution of marijuana. And that difference decreases the risk that the company could be shut down or fined by the federal government.

Can Americans legally invest in publicly-traded stocks and funds related to the business of cannabis?

Yes. There are companies both here and abroad that engage in the lawful creation, marketing or distribution of products that utilize cannabinoids as an active ingredient. This can include tobacco, fertilizers, plant foods, pesticides, as well as real estate and personal health products. It’s always a good idea to do your due diligence and check a stock or fund’s prospectus before purchasing an investment.

Learn more about investing in the business of cannabis.

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By Lindsay Goldwert
Lindsay Goldwert is Senior Editor at Stash.

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