Reading time - 10 minutes - May 22, 2023
Cannabis has been illegal in the UK for decades – at least for recreational purposes. This prohibition includes an outright ban on producing, supplying, and use of cannabis products for non-medical purposes. Therefore, many people will be surprised to learn that it is possible and, importantly, legal to invest in the cannabis industry. You see, as attitudes toward cannabis and its use continue to change, a growing number of countries are loosening their once-strict laws on the plant, and with more liberal legislation comes the development of legal cannabis businesses and corporations.
So, how exactly do you invest in cannabis? In this article, we’ll walk you through the legality of cannabis in various jurisdictions around the world, how the industry is developing here in the UK, and ultimately, the best ways to invest in cannabis right now. To kick off, let’s cover cannabis in the UK.
On November 1st 2018, the UK government officially introduced legal access to cannabis products for medicinal purposes. This landmark law change meant that patients with a wide range of health conditions, from chronic pain and cancer to PTSD and anxiety, would be able to access licensed and unlicensed cannabis-based medicines on prescription. However, in order to do so, a specialist clinician would have to approve the prescription.
The move was a vital step in improving patient access to medical cannabis, yet only a handful of prescriptions have been granted through the NHS to this date. This is because the National Institute of Health and Care Excellence (NICE) currently only recommends the use of medical cannabis for three indications: nausea and vomiting related to chemotherapy, treatment-resistant epilepsy, and spasticity associated with multiple sclerosis. This means that the vast majority of patients (tens of thousands of them) have no choice but to access their medication via private clinics where costs can be substantial.
While access to medical cannabis in the UK has improved since 2018, the country’s medical cannabis sector actually predates the law change. In fact, even while maintaining that cannabis has no medicinal benefit, the UK was consistently one of the largest exporters of medical cannabis worldwide. In 2016, the UK was the main producer and exporter of cannabis-based medicines – the vast majority of this in the form of Sativex, a cannabis extract approved as a treatment for spasticity.
Still, public investment in the cannabis sector remains a relatively new prospect in the UK. In 2020, the Financial Conduct Authority (FCA) announced that UK-based cannabis companies would be allowed to be listed on the London Stock Exchange (LSE).
In several countries outside of the UK, investment opportunities have been open in the cannabis sector for much longer. For example, medical cannabis has been legal in Canada since 2001. Still, it is only in recent years that the cannabis sector has begun to gain significant attention from investors around the world.
So, how could you get involved?
According to calculations by Grand View Research, the global legal cannabis market will reach a value of $73.5 billion by 2027. When it comes to investing in cannabis, there are a number of options to consider. For example, you may want to get involved in the CBD sector – a section of the wider cannabis industry that has become more mainstream in recent years, thanks to the legal status of CBD in many countries around the world. On the other hand, a number of medical cannabis and increasingly, recreational cannabis companies are going public on major stock exchanges. Therefore, it is possible to buy cannabis stock in a number of areas.
In general, cannabis stocks refer to any company or business that uses cannabis to create a legal product, either for consumers or for other companies. Currently, the sector can be broken down into three primary categories:
While it can be easy to think of cannabis in its raw form, or perhaps as extracts or medicines, the industry is, in fact, much more diverse. There are a huge number of other products that also constitute cannabis products, including food, beverages, beauty products, and skincare.
Despite having such a high number of potential applications, barriers remain for cannabis companies looking to enter the stock exchange in the UK. It isn’t surprising that cannabis companies remain subject to strict regulatory conditions, given the ongoing issues of legality surrounding the plant.
For example, most cannabis-based products, including CBD-based products, require regulatory approval before they can be sold in the UK. All CBD products sold in the UK must now be linked to a Novel Food application, the approval of which is designed to guarantee the safety and compliance of the said product. Since March 2022, CBD products that are not linked to a Novel Foods application with the Food Standards Agency (FSA) are no longer permitted to be sold to consumers.
Furthermore, UK-based medical cannabis firms also require additional authorisation from the Medicines and Healthcare Products Regulatory Agency (MHRA). This level of regulation can prove both expensive and time-consuming for UK cannabis companies and can also elevate their risk profile in terms of investment. In recent years, this – coupled with ongoing debate around further legalisation – has given cannabis stocks the reputation of being volatile and unpredictable; however, there are some cases where this risk may also deliver higher rewards for investors.
There are now a number of cannabis companies listed on the London Stock Exchange. These represent all three of the categories mentioned above (grower and retailers, medical, and ancillary). This includes companies that cultivate and process cannabis for medical purposes, manufacturers of CBD products, and companies that provide legal products and services to these businesses. However, companies that manufacture or supply no-medical cannabis-based products containing THC, which remains controlled in the UK, are not permitted to list stock on the LSE.
The UK is far from the only country offering investment opportunities in the cannabis sector. In fact, much more diverse options are available in countries where recreational cannabis has been legalised, such as Canada. Medical cannabis has been legal in Canada for over 20 years; however, it wasn’t until 2014 that the first cannabis company was listed on Toronto’s TSX Venture Exchange.
At the time of Canopy Growth Corp.’s – then Tweed Inc – stock debut, Canada had only recently licensed the first commercial growers to provide medical cannabis for the country’s growing patient base. Since then, a number of other cannabis companies have gone public on the Toronto Stock Exchange, including a number of companies involved in the cultivation, manufacture and supply of recreational cannabis products.
Canada’s stock exchange is also home to a number of US-based cannabis stocks. US cannabis stocks have a much more complex regulatory environment to manoeuvre. While over two-thirds of Americans now live in a state where both medical and recreational cannabis is legal, both forms of cannabis remain illegal at the federal level. This significantly limits the geographic expansion of cannabis businesses in the US.
However, in April 2022, the US House of Representatives passed a bill that would – if approved by the Senate – legalise cannabis on the federal level. If this were to go ahead, the US cannabis industry could quickly become the largest in the world.
Of course, it is also possible to invest in cannabis in various other places around the world, including in South America, Europe, Asia, and Australia. If you are based in the UK, however, there are many options for you to consider, including ‘pure play’ businesses, ETFs, and Large-cap Stocks with cannabis exposure.
So, now that we’ve touched upon where to invest in cannabis, let’s take a closer look at how to invest in cannabis. There are essentially three ways to invest in cannabis: through ‘pure play’ cannabis stocks, ETFs, and large-cap stocks with cannabis exposure. But what are these?
This type of cannabis stock refers to publicly-traded companies that operate entirely within one sector – cannabis. As we mentioned earlier, the publicly-traded cannabis companies in the UK can currently only work in the medical cannabis or consumer goods (e.g., CBD oils and extracts, edibles, and skincare, etc) sectors. Companies working in recreational cannabis products, such as non-medical cannabis-based products containing THC or other controlled cannabinoids cannot be publicly traded in the UK.
Cannabis Exchange-Traded Funds or ETFs bundle together a number of cannabis-related stocks from various regions and sectors of the cannabis industry. Investing in ETFs can be a good option for diversifying your holdings in the cannabis market. However, there is currently only one ETF operating in Europe, so if you are interested in this option, it may be necessary to do some proper research and look further afield.
There is no question that cannabis has become increasingly mainstream in recent years. The drug is beginning to shed a lot of its previous stigma, with the launch of the global CBD industry doing a lot to rehabilitate the plant in the eyes of the public.
As such, a large number of large-cap international companies have dipped a toe in the fledgling cannabis industry over the last few years. Through investing in ‘pure play’ cannabis companies or expanding their own operations into the cannabis space, some household names are now paying close attention to the development of the cannabis industry – and they could help you to do the same. While some of the large-cap stocks that have been linked to cannabis may be based outside of the UK, many of them are listed on the London Stock Exchange.
Finally, Real Estate Investment Trusts (REITs) with cannabis exposure may be another option if you are looking to dip your toe into cannabis investment. REITs are companies that own, operate or finance profit-producing real-estate holdings; for example, warehouses, processing facilities and retail outlets. Such companies looking to expand into the cannabis sector may invest in such facilities for growing the crop, processing or distributing cannabis products.
Despite a number of promising developments in recent years, including the legalisation of recreational cannabis in Canada and a number of US states, revenue growth has remained relatively slow in the cannabis industry. Using Canada as an example, demand for legal cannabis has reportedly been weaker than hoped for. As in any sector, there is no guarantee of strong returns when investing in cannabis. Still, if you’re interested in diversifying your investment portfolio with cannabis stocks, be sure to carry out the necessary research and be aware of the financial risks.
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