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The cannabis sector can still offer meaningful returns if you have patience and a clear understanding of the risk-reward landscape. But the path to profitability in this industry is anything but straightforward. 

With several catalysts potentially on the horizon, and timing for any of them far from certain, investors need to know where they’re placing their bets, and why.

Before diving into those catalysts, it’s worth noting that they won’t deliver returns on their own; the structure of your investment matters. Are you investing in debt or equity? Are you prepared to wait for a regulatory breakthrough, or are you looking for current income and downside protection in the meantime?

Understanding the Capital Stack: Debt vs. Equity

Debt investors may find attractive yields in the cannabis sector, but they face significant extension risk. 

Many operators with maturing debt have limited access to refinancing, which can lead to extensions that dilute equity or delay returns. According to Viridian Capital Advisors, over $2 billion in cannabis debt is maturing in the next 18 months, and more than half of it is trading at a discount, reflecting investor concern over repayment risk. 

While loans may be secured by hard assets or licenses, foreclosing on cannabis assets is often complicated by regulatory restrictions. In many states, assuming control of a license requires regulatory approval, which can be slow, uncertain, and burdensome. Even when foreclosure is possible, many investors are reluctant to pursue it due to the compliance obligations involved in owning or controlling a cannabis license.

Equity investors may see compelling entry points, particularly in beaten-down stocks trading well below intrinsic value. Still, investors must evaluate capital structures closely. Some operators face near-term debt maturities with no clear path to refinancing. In these cases, the risk of dilution is high, as companies may offer deeply discounted equity or warrants to extend maturities and stay afloat.

The Ancillary Bet: Cannabis REITs

For those uncomfortable with the direct risk of plant-touching operations, ancillary companies such as Turning Point Brands (TPB) or Grow Generation (GRWG), may offer a more balanced approach. 

These businesses, providing equipment, services, and capital to the industry, are generally not subject to the same regulatory and tax burdens. Ancillary companies often provide clearer reporting, traditional business models, and fewer licensing complexities. While their upside may be more modest than that of vertically integrated operators benefiting from sweeping reform, they typically offer more stability and transparency around margins, contracts, and operations.

Another option: REITs focused on the cannabis sector. These publicly traded real estate investment trusts, such as NewLake Capital Partners (NLCP), offer investors a way to gain exposure to the industry through rent-generating real estate assets, often secured by long-term leases or collateral. Many of these REITs pay quarterly dividends, providing current income while investors wait for broader industry reform. The value of investing in cannabis-focused REITs isn’t the dramatic upside potential of a turnaround equity play – they provide consistent income as well as downside protection through asset ownership and structured lease agreements.

Policy Catalysts: The STATES Act & SAFER Banking

Cannabis remains a sector in transition. Some companies are adapting and finding a path to sustainability; others are not. Legislative and regulatory change could significantly shift the landscape—but betting on timing is a risky game.

Two of the most commonly cited potential catalysts for cannabis are regulatory: the federal rescheduling of cannabis and the passage of legislation like the SAFER Banking Act or the STATES Act. Each carries different implications for how capital flows into the industry, how companies are taxed, and how they operate.

Rescheduling, which would move cannabis from Schedule I to Schedule III under the Controlled Substances Act, would not legalize cannabis federally, but it would offer a major benefit to operators by eliminating the 280E tax burden. 

According to Whitney Economics, 280E has inflated the effective tax rate for cannabis businesses to 60–70%, compared to 21% for most legal businesses. Eliminating this would allow cannabis companies to deduct ordinary business expenses, improving margins overnight.

The SAFER Banking Act, on the other hand, is aimed at providing cannabis operators greater access to the financial system. SAFER would allow banks to serve cannabis businesses without federal penalties, improving access to loans, payment processing, and other basic financial services. 

As of Q3 2024, more than 800 financial institutions were working with cannabis-related businesses, but most were small community banks and credit unions. Large national banks have stayed out due to federal restrictions, limiting access to affordable capital and banking services.

The STATES Act, meanwhile, would exempt cannabis businesses in legal states from the Controlled Substances Act entirely, essentially codifying the federalist approach and reducing the risk of federal intervention. This would provide greater long-term certainty for operators and investors alike.

If you believe that reform is coming—whether through rescheduling, banking reform, or state-level expansion—and you have the ability to wait for it, this cycle could represent an attractive entry point. But it’s not a one-size-fits-all opportunity. Your approach should be grounded in a clear understanding of the risks, the structures of each individual investment vehicle, and the potential rewards.

There is green to be had. But these days, it belongs to the disciplined and the patient.