Making money from new-age agriculture:
Possession and use of Cannabis related agricultural products are becoming more and more mainstream for health, industrial and recreational usage. Here in Luxembourg, this increased acceptance has been reflected in very recently proposed legislation decriminalizing the ownership, use and even cultivation of small quantities of cannabis products for private personal usage. Considering this greater acceptance and with the full range of cannabis products coming into the marketplace offering potential for very high investor profits, now might be a good time for adventurous investors to start to consider to include cannabis related products in their portfolio of diverse investments. But clearly major hurdles remain. National laws concerning the legality of cannabis products are not yet harmonized with different jurisdictions taking different positions. So before you invest, it is best to know what is legal where and what changes are being considered in which jurisdictions to ensure that to make sure that you have mitigated all possible risks
To give us a good picture of the current situation and near-term trends, AMCHAM has approached Dr. Philipp Mössner, partner at the law firm GSK Stockmann in Luxembourg, and he has kindly agreed to discuss these issues.
Amcham: What is the legal status of cannabis both as an agricultural product and as retail derived products for medical, industrial and recreational usage in Luxembourg, EU jurisdictions, the United States and Canada?
Dr. Philipp Mössner: Before I go more into details about the legal status and the latest news from the Luxembourg government, I like to stress first that with regard to “cannabis” as a product, that a distinction must be made between products of the cannabis plant that do not contain tetrahydrocannabinol (THC), and which are therefore not suitable as narcotics, such as industrial hemp fibre products and Cannabidiol (CBD), and products with a certain THC-content. The latter, in turn, should be further distinguished as to whether they are used for medical or recreational purposes. THC-containing products are already available for medical use as medical hemp, since 2001 in the Netherlands, 2017 in Germany and also since 2018 in Luxembourg while the recreational use of THC-containing products and its potential legalization is currently a much-discussed topic in Germany and Luxembourg.
With respect to the legal status, the situation is very intricate depending on the respective country, the kind of cannabis plant, the part of such plant used, the derived product, its quantity, biochemical composition and usage. A broad statement such as agricultural products are legal and recreational products are not, would be far too undifferentiated. I also perceive some sort of inaccuracy when the term “legalization” is used. For example, would legalization mean only some sort of softening or a complete abolition of all legal consequences which currently can range from legal over illegal-but-tolerated to severely sanctioned by fines and imprisonment. And would legalization of cannabis for recreational purposes cover also each and every part of a supply chain consisting of cultivation, processing, advertising, distribution, possession and consumption or only parts of it? For example, in the Netherlands, contrary to popular belief, only sales in coffee shops are legal, but not the upstream part of the distribution chain. In Canada, however, not only consumption, but also production, possession and sale are comprehensively legalized and regulated since 2018. In the USA, on the other hand, consumption, possession and home cultivation are legal in some states only. Hence, this few examples show there is globally a very inconsistent situation mich makes investing a complex analysis.
As regards Luxembourg, the Luxembourg government seems to have well understood both the legal complexity and the need for supply-chain consistency. Less than two weeks ago, the Luxembourg government outlined precisely the key items of a future draft law on recreational cannabis use, which shall be regarded as first step. If adopted as currently proposed, firstly, a full legalization will apply to personal use by adults of cannabis derived from self-cultivation of up to four plants per household. The legalization would hence also encompass procuring the seeds, producing the cannabis within its own walls (or garden), possessing and consuming it. While it remains to be seen in practice whether this grow-your-own-at-home-formula will have any meaningful effect on the illegal market, at least the supply-chain dilemma and inconsistency of the Dutch approach was clearly recognized and addressed by creating a tiny, but completely legal cannabis-“ecosystem”. Secondly, the future law would bring an important softening of the penal law concerning the consumption and transport of cannabis for recreational use. For a quantity of up to 3 grams of cannabis the consumption and transport of it will be downgraded from a criminal offence to a misdemeanor. Fines are planned to range between EUR 25 and EUR 500 instead of between EUR 250 and EUR 2,500. Above 3 grams and for car drivers nothing is going to change.
What are the legal risks for investors in these separate jurisdictions?
The legal risk differ from jurisdiction to jurisdiction and the main point is to understand which investments are possible and which are not. A security issued by a listed Canadian cannabis company, for example, can be a legal investment for a Canadian citizen being resident in Canada, but not for anybody else. Currently, cannabis-related investments are only possible to a very limited extent due to the lack of legality in Germany and Luxembourg. In September 2018, Luxembourg’s financial regulator, the CSSF, had deemed the trading and settlement of cannabis securities illegal, as a result of which Deutsche Börse had to stop handling trades of about 145 cannabis companies, since foreign securities settlement is processed through its Luxembourg subsidiary, Clearstream Banking Luxembourg. Still to this day, not all securities issued by cannabis companies can be classified as eligible and settled by Clearstream. The most important characteristic for the classification is whether the main business purpose is medical or recreational cannabis. Clearstream has published a list of currently 23 eligible Canadian and U.S. securities that are subject to restricted asset servicing. Securities that are not on this list are not eligible.
Similar restrictions apply to non-listed securities and other investments in cannabis companies. Although there is, as to my knowledge, no official statement from the CSSF on fund investments in cannabis products, in the end the assessment is the same. Based on the current legal situation, investment funds in Luxembourg can legally only invest in companies (in the case of alternative investment funds) or in securities of companies (in the case of UCITS funds), with a clear reference to medical cannabis, provided that the investment policy and the risk profile of the fund allow such an investment at all. I currently do not see that the proposed new law in Luxembourg will change that assessment immediately, but I would be a strong supporter to address this question in the upcoming discussion of the new law in the parliament.
What actions are likely over the coming 5 years and how can these anticipated changes impact the investment opportunities?
I think we see a clear trend, and with the draft law proposal of the Luxembourg government now also clear proof, that some European governments want to address the recreational use of cannabis and combat the illegal market and organized crime. Therefore, it is not unlikely that we will see also a draft law in Germany maybe purporting the licenced distribution of cannabis for recreational use to a certain extent. For Luxembourg, the proposed draft law is a watered-down proposal of the initial ideas and will not yet have any meaningful impact on security investments. But it is a first step which may be followed in the medium term by a second step to go even further regarding the legalization of the recreational use. Whether these initiatives will be sufficient to create in the end also investments opportunities remains to be seen.
How and why did you get involved in the topic?
I traveled to Canada four years ago visiting several independent business law firms and was much impressed by the professionalism how the financial and legal industry embraced cannabis as an investable asset. I realized that in Europe we see cannabis too much from an end-user perspective and not enough from a financial industry’s and producer’s perspective. Also, many US-lawyers I spoke to over the last years were very interested in this topic and wanted to know more about the legal status in Europe.
How will legalization in Luxembourg and/or Germany affect the cross-border financial sector?
Depending of course on the extent of legalization, I would think that cannabis-related investments could finally become possible in Germany and Luxembourg. Trading and settlement of cannabis securities would no longer be illegal, and Deutsche Börse could allow again the trading of cannabis companies and settle these through Clearstream, without being blocked by the CSSF. Therefore, it would be desirable if the legislative projects in both neighboring countries, which are so closely connected, would proceed synchronously. If the recreational use of cannabis were indeed to be legalized to a certain extent in both countries, this would hold considerable potential for the financial center in Luxembourg.
Why haven’t the plans to legalize Cannabis in Luxembourg advanced much further until today?
First of all, the Covid-19 pandemic has pushed this subject understandably further back on the political agenda. Secondly, politicians are aware that opinions differ on the legalization of cannabis for recreational use and entails risks. The Canadian legalization process is not only a success, but also a good example of somehow exaggerated expectations, stock market hype and initial infrastructural weaknesses. And the Dutch example of cannabis tourism, certainly also not a desirable effect. Thirdly, against the backdrop of the UN convention on the control of narcotic drugs and the pertinent laws of surrounding countries, one needs to understand that a single country cannot just go ahead and completely legalize the full supply chain of cannabis for recreational use. Finally, it should not be forgotten that a future regulatory framework is supposed to, at least partly, replace an established, illegal market. Hence, the legislator is therefore not to be envied for weighing up the opportunities and risks and passing a well thought-out law. I am therefore not surprised that the Luxembourg government prefers to advance on this topic only step-by-step.
Amcham would like to thank Dr. Philipp Mössner for this interview!
