A report, issued on Tuesday by Bianchi & Brandt, “assesses the current mergers and acquisitions environment, reflects on the impact of regulatory changes to federal legality—including access to traditional banking—and takes deep look at the viability of U.S. cannabis operators and global investors who are fueling the industry,” the Arizona law firm said in a press release.

Titled “A Corporate Law Perspective on The Great Correction in Cannabis M&A,” the firm’s proprietary trend report was “driven by the impactful insights of founding partners Laura A. Bianchi and Justin M. Brandt, who have more than 15 years of experience in the nascent cannabis industry.”

“The Great Correction is really all-encompassing,” Brandt said in the press release. “It applies to the cannabis industry’s initial frenzy of loose valuations with handshake deals that marked the start of the cannabis boom. The industry has since been invigorated by possible reform in cannabis policy at the federal level for the first time.”

The 15-page report opens with a section called “The Green Rush Is Over,” which details the diminishing returns in the once-bullish cannabis industry. The decline, the law firm says, has thrust small and medium sized cannabis businesses into the spotlight when it comes to mergers and acquisitions.

“The economic boom began in 2012 when Washington and Colorado legalized cannabis for adult use, jumped in 2018 when California recreational sales started, and surged dramatically again when legal cannabis was deemed “essential” by many states during the pandemic’s early lock-down phase in 2020. That script has since flipped to a scenario of oversupply, widespread layoffs, investment failures and plummeting stock prices.

The type and scale of cannabis M&As that the industry enjoyed prior to and during the pandemic was “corrected” in 2022 after the recent industry crash, and market conditions have returned M&A activity to a more grounded environment. Small and midsize businesses (SMBs) are now the focus of most of the activity,” the report says. 

But the authors of the report assert that it “is not all doom and gloom,” and “this is not abnormal.” 

“Market corrections are a necessary pathway to the long-term health and sustainability of the cannabis industry—and we’ve been working with our clients and partners to anticipate The Great Correction at hand so we can be prepared for where the market is headed next,” the report said.

A subsequent chapter deals with recessionary fears.

“Despite the old axiom that vice products are ‘recession proof,’ the global inflationary woes and macroeconomic issues the U.S. is dealing with continue to leave their mark on cannabis.

The current recessionary thinking has investors getting cold feet, and those feet are even more frigid when they’re talking about investing in the federally illegal cannabis industry. That illegality translates to limited access to all types of capital—including the most basic banking services, which businesses in other industries take for granted,” the report said. “The failure of Silicon Valley Bank justifiably made headlines and enforced investors’ wary outlook because of the services the bank provided to ancillary cannabis businesses. Their risk-averse or ‘risk-off’ strategy is only increasing the difficulty of raising capital in cannabis.”

Since Washington and Colorado made history by passing recreational cannabis legalization in 2012, dozens of states and cities have followed suit. 

But another chapter in the Bianchi & Brandt explains how regional policy shapes mergers and acquisitions, and that “no two state markets are the same.”

According to the report, factors that may vary from state to state include: “Caps on statewide licenses (including local restrictions) vs. open markets”; “Licensing structures (including vertical or horizontal integration)’; ‘Medical cannabis program requirements’; and “Allowable product categories, including edibles and concentrates.”

The report goes on to provide specific examples across various states. 

“In Utah, licensed medical operators are enjoying great success primarily due to the newness and restricted size of the market. In Illinois, caps on licenses and their scarcity make them highly valued and highly coveted. In a head-to-head comparison, Arkansas’ 38 medical dispensaries servicing its 3 million residents are worth significantly more in acquisition value than Oklahoma’s 2,800 medical dispensaries servicing the state’s 4 million residents. Investors are currently doubling down in Florida, betting on a potential adult-use vote in the coming year or two,” the report said. “New York, which is positioned to be one of the largest cannabis markets globally, is an instructive case of access fueling M&A activity. Capital raises and M&A transactions surged after New York legalized recreational sales. The recent announcement of 1,500 new cannabis business licenses and extended application deadlines will only increase the M&A enthusiasm pervading the Empire State.”

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