The cannabis industry has been on a roller coaster ride in recent years. In 2018, Canada legalized marijuana, and over the past decade, many U.S. states did as well, although cannabis remained illegal at the federal level.
But two weeks ago, a big change occurred in the cannabis industry when the Drug Enforcement Agency (DEA) approved the U.S. Department of Health and Human Services’ (HHS) recommendation to reclassify marijuana as a Schedule III drug, down from the Appendix I classification it previously held. Short of going all the way to legalization, this is a big step forward that will ease the enormous tax burden on U.S. cannabis companies and likely move many of them from loss-making to profitable operations. .
Canadian operator SNDL Inc. (NASDAQ:SNDL) showed foresight and intelligence in trying to access the American market. On the heels of the DEA’s decision, SNDL made a significant announcement that is expected to improve its long-term growth prospects, as it has found an opportunity to enter the US market while maintaining its listing in the US market. Nasdaq Stock Exchange.
SNDL’s long and winding road to US markets
SNDL was once a small cannabis player called Sundial Growers. With the Canadian market oversupplied during the pandemic, the company nearly went bankrupt. However, Sundial miraculously became a meme stock towards the end of the pandemic and saw its stock price skyrocket.
Management was smart and took advantage, selling about $1 billion worth of stock at extremely high prices that made no sense. With its coffers stocked with cash, management then redeployed that cash to various assets. These included a profitable Canadian alcohol retail business, debt and equity securities of struggling Canadian cannabis companies, and a joint venture called SunStream Bancorp, which existed for providing loans to U.S.-based cannabis companies.
It was a clever way to get around the barriers that prevented Canadian companies from accessing the American market. Canadian cannabis companies like SNDL have been able to list on major U.S. exchanges because their operations are legal in their own country. However, American cannabis companies must trade in the least liquid over-the-counter markets due to the federal illegality of cannabis in the United States. And publicly traded Canadian companies were not allowed to have plant-related operations in the United States.
But SNDL used SunStream as a smart way to gain exposure to the high-growth U.S. market. SNDL is just an “investor” in SunStream, which is actually controlled by third-party investors and only invests in the debt of US cannabis companies. The idea was that if the borrowers of SunStream’s loans were successful, SunStream would earn high interest on that debt. If the companies restructured or went bankrupt, SunStream would be able to take over their operations.
The lack of direct control and exposure to debt appeared to convince U.S. regulators that SNDL, the company, was not actually engaged in “factory touching” operations in the United States. But…
