Jeff Sessions has delivered a blow to the marijuana industry’s ability to raise capital

In case it wasn’t clear before: Marijuana is illegal at the federal level.

For an industry that was expected to generate roughly $40 billion in economic impact by 2021, Thursday’s move by U.S. Attorney General Jeff Sessions and his Justice Department to rescind an Obama-era policy used as a protection for states that have legalized marijuana could be a major blow.

“This should not come as a surprise,” said Rafael Lemaitre, former associate director for public affairs for the Drug Policy Office under President Obama.

“We don’t know how this might play out legally,” he said. “But this will create a significant chilling effect on investors who had hoped to cash in on a new ‘green rush.’ Before Trump, you would have to just be risk [tolerant] to put money behind the marijuana industry; now you’d have to be downright crazy. Despite public polling showing its popularity, the cards are stacked against a successful long-term business model here.”

The news comes just as the industry gained its biggest state ally as California began the sale for recreational adult use of marijuana. After a rally earlier this week, Thursday’s news saw marijuana stocks take a nose dive.

Don’t miss: Cannabis stocks tank on reports DOJ will reverse course on state legalizations

Shares of the Canada-based Horizons Marijuana Life Sciences ETF HMMJ, +0.00%  fell as much as 15% from the previous sessions’ close and the ETFMG Alternative Harvest ETF MJX, -2.17%  fell as much as 10%. The S&P 500 SPX, +0.20%  was up 0.5% and the Dow Jones Industrial Average DJIA, +0.20%  was up 0.6%.

Nick Kovacevich, the chief executive of cannabis packaging company Kush Bottles Inc. KSHB, -18.52% said the immediate response to the news is an overreaction considering what he views as the likely outcome, which is not a complete washout.

Shares of Kush Bottles, which trade over the counter, were down more than 33%.

“I think most people in the industry would say it’s going to continue to grow in the right direction,” Kovacevich said. “Are people going to pull their money out? Yes, some will, so there should be some concern about the industry’s ability to raise capital.

“But if companies can’t raise $10 million and can now only raise $1 million, it just means that company will grow slower. The momentum is already there.”

Sessions and his department are doing away with what is known as the Cole Memo. Written by Obama’s Attorney General Eric Holder’s office, the four-page document outlined how the federal government would enforce marijuana laws, stating that the federal government would not interfere with states that legalize recreational and/or medical marijuana, as long as they adhere to a set of guidelines.

“It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribal, and federal law enforcement partners to carry out this mission,” Sessions said in a statement.

Also see: Why the weed industry should worry about Session’s letter to Congress

Read: Congress gives medical marijuana users a good reason to be paranoid

Despite growing acceptance of legal marijuana, the drug is still illegal at the federal level and is labeled a Schedule I substance, alongside heroin and LSD.

That is the message senior Justice Department officials kept reiterating during a press briefing with reporters on Thursday: It’s clear that marijuana is against federal law.

Sessions and the Department of Justice were convinced there was a view that the Cole Memo gave states, and individuals in states with legal marijuana, a safe harbor. He wanted to clear up any confusion about U.S. attorneys’ ability to bring charges and trump state laws.

“It just shows how out of touch Sessions is,” said Morgan Fox, the director of communications for the Marijuana Policy Project. “He’s out of step with his own advisers, he’s out of step with the president—who has said it’s a states’ rights issue—and he’s out of step with the American people.

“The Marijuana Policy Project is going to continue lobbying to end federal marijuana prohibition, but the people operating legitimately, taxpaying marijuana businesses in legal states absolutely need to step up and get more involved.”

Sessions was a staunch opponent of marijuana long before taking up his current office. The former U.S. senator from Alabama once said, as CNN and others have reported, he thought KKK members were OK until he learned that they smoked marijuana. He later said that was a joke.

Sen. Cory Gardner, a Republican from Colorado (arguably the epicenter of the legal-marijuana trend), said the move by the Justice Department would stand in direct contrast to what Sessions said before being confirmed as attorney general:

In a separate tweet, Gardner said he would “take all steps necessary,” including placing a hold on DOJ nominees, until Sessions lives up to that commitment.

The likelihood that things will change for businesses operating within the boundaries and laws of states that have voted to legalize recreational and, or medical marijuana is low, according to Kovacevich and Lematrie.

In theory, an attorney general in a state with legal marijuana could decide to go after any business he or she thinks merits prosecution. These decisions are up to the attorney generals. Sessions is making it clear they have every freedom to bring marijuana-related charges against individuals, as they do with any other illegal drug.

It has never been the federal government’s focus, however, to go after relatively low-level drug offenders, Lematrie said—the Justice Department doesn’t have the time or money.

In some cases, especially in states where marijuana is already legal, federal prosecutors have no intention of impeding the growth of the industry. In a May 2017 interview with Politico, California Attorney General Xavier Becerra was steadfast in defending the states legalization of recreational marijuana.

“I would love to see Jeff Sessions come to California and tell us we’re not going to move forward on cannabis. Something tells me that it’s not gonna happen,” Becerra told Politico. “I’ll probably be the 1 millionth person in line to fight Jeff Sessions on that.”

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