The cannabis sector has hit a summer slump, weighed down by a series of scandals, regulatory deadlock and a growing sense that the industry is not delivering the gold rush-like returns that some investors were expecting.

The ETFMG Alternative Harvest ETF MJ, +0.48% has fallen 17% in the last three months, as the major stock benchmarks have stretched to fresh highs. The S&P 500 SPX, +1.59% and Dow Jones Industrial Average DJIA, +1.33% have gained about 3% in that time frame and hit record levels.

The slump comes after some unsettling events, including a recent crop of weaker-than-expected earnings from the Canadian licensed players, a full nine months into legalized recreational cannabis. The ousting of Bruce Linton from market leader Canopy Growth Corp. CGC, -0.70% WEED, -0.36% , the scandal involving illegal growing at CannTrust Holdings Inc. US:CTST CA:TRST and this week’s regulatory crackdown on Curaleaf Holdings Inc.’s CBD products have added to the downdraft.

“All of those hits are hurting momentum,” said Rob Di Pisa, co-chair of the Cannabis Law Group at law firm Cole Schotz. “It’s just been one thing after another.”

This cannabis ETF has fallen sharply while the S&P 500 has gained

The firing of Linton, viewed by many as the face of legal cannabis given his high profile and frequent media appearances, was a shock for many and a sign that the industry’s freewheeling ways may be over. Linton himself acknowledged to MarketWatch that the $4 billion investment that he and co-CEO Mark Zekulin accepted from Corona beer distributor Constellation Brands Inc. STZ, -0.02% late last year had contributed to their downfall.

Constellation, frustrated by Canopy’s mounting losses, put the pressure on. Chief Executive William Newlands expressed his impatience on his company’s last earnings call.

“While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy’s recent reported year-end results,” Newlands told analysts. “However, we continue to aggressively support Canopy on a more focused long-term strategy to win markets and form factors that matter, while paving a clear path to profitability.”

Read now:One Canopy Growth co-CEO is out, and the other isn’t far behind in major shake-up at world’s largest cannabis company

DiPisa said the move is a signal to the sector that institutional money and an institutional mindset has moved in. “Linton is what cannabis should be,” he said. “Now we’re seeing the big boys and the big dollars want money from their investment, which makes sense, but it feels as if some of the romance and passion is gone.”

See:Marijuana-delivery service Eaze scales back $1 billion ambitions, documents show

The move has not exactly boosted the stock, either. Canopy shares have fallen about 10% since Linton left and are down 25% in the last three months.

Crackdown on CBD

The shenanigans involving unlicensed growing at CannTrust have crushed that stock, which has fallen 74% in the last three months. Health Canada seized more than five metric tons of the company’s cannabis in early July after discovering it was being harvested in unlicensed rooms. The news has gotten even worse since, as the Canadian media have uncovered emails showing top management were aware of the grow and a Danish partner confirmed that some of the illegal weed had been exported, which is a breach of the Canadian Cannabis Act and an indictable offense. (CannTrust fired its CEO Peter Aceto and President Eric Paul resigned late Thursday, as MarketWatch’s Max A. Cherney reported.)

The FDA’s warning letter to U.S. company Curaleaf this week sent another chill across the sector. The FDA cracked down on the company for claiming that its CBD products could treat serious diseases, including Alzheimer’s disease, opioid withdrawal, pain and pet anxiety, among others.

For more, read:Curaleaf shares tumble 8% after FDA sends warning letter over CBD health claims

CBD has been in a regulatory limbo ever since last year’s Farm Bill legalized hemp but not CBD. CBD is a non-intoxicating ingredient in the plant that is widely held to have wellness properties. The FDA views CBD as a drug because it is the main ingredient in the only FDA-approved cannabis-based drug, GW Pharma PLC’s GWPH, +1.97% Epidiolex, a treatment for severe forms of childhood epilepsy.

The FDA has told companies that they cannot add CBD to food or beverages until it devises a set of rules, although it appears willing to tolerate it in topical products — as long as companies don’t make serious health claims.

See:This company wants to be the Bacardi of cannabis — and it has plans for an IPO

Analysts said Curaleaf was asking for trouble, given its aggressive push into the space via a partnership with drugstore chain CVS CVS, +1.07% , which has pulled the products named in the FDA letter.

“Among MSOs, Curaleaf has made the largest push into CBD — with a full “Curaleaf Hemp” line,” said Andrew Kessner, analyst at William O’Neil & Co. “And the CVS partnership brought them a lot of attention. So they’re a good company to make an example of — you can bet that any other MSO with similar content/claims on their website has already taken it down.”

Banking on weed

Perhaps the biggest obstacle for the U.S. sector is the slow pace of regulatory change in recent months with this week’s Senate hearing on banking and cannabis especially disappointing, according to DiPisa. The hearing heard from a range of speakers on how the lack of access to banking services is holding the sector back.

As long as cannabis is illegal at the federal level (regardless of state approval), banks that are federally insured are nervous about dealing with cannabis companies for fear of an enforcement action. The result has been to create a business that operates mostly in cash, creating serious security risk for employees.

“I thought the banking issue would be the easiest to pass, but what surprised me most about the hearing was how few Republicans and Democrats showed up,” said DiPisa. “Whether you are pro-cannabis or not, banking is such a fundamental part of any business, it’s crazy that they won’t even show up. There’s no other industry in the U.S. that has this issue.”

Read now: Key Republican sounds noncommittal on protecting banks that work with the marijuana industry

Related: Cannabis company’s CEO: Being unbanked meant paying $3 million tax bill in cash

And that’s not all. As Stifel analyst W. Andrew Carter notes, momentum has also stalled at the state level since late last year, when there were hopes that three big states, New York, New Jersey and Illinois were poised to legalize. But the New York and New Jersey legislatures were unable to agree on legislation, despite strong public support and backing from state governors, leaving only Illinois to come through.

“The heightened interest from the Department of Justice into U.S. industry acquisitions has at best slowed industry consolidation leaving a number of large of MSOs with key platform acquisitions outstanding,” Carter wrote in a note this week. “The DOJ’s approach potentially dampens a key theme for owning the U.S. MSOs which includes its advantaged position for consolidating the highly fragmented category.”

Read:Cannabis industry’s lobbying on track to hit a new record

The cannabis sector is already splitting into “haves and have-nots” as the cost of capital climbs, especially for smaller companies, said Carter. He cited the example of Flowr Corp. FLWR, +4.76% FLWR, +4.76% a small Canadian licensed producer, that conducted a bought deal financing this week at a price that was well below its previous trading price after failing to complete a secondary offering. The price was about 30% below the June 25 close before the financing was announced.

“The significant capital needs of the industry are often underappreciated with cost of capital a key competitive consideration; this announcement underscores the difficult financing environment prevailing for cannabis companies at present,” said the analyst.

See now:Cannabis sector hammered as CannTrust slides another 24%

How California's 'Weed Nuns' turned CBD into a million-dollar business

Even Aurora Cannabis Inc. ACB, -2.88% ACB, -1.88% may struggle to expand on its number two position in the Canadian recreational market — that company has said it needs $1 billion to execute its game plan and may have to pay up for it, he said.

The industry is still mostly driven by retail investors chasing gains, and those are becoming more elusive.

Peter Miller and Billy Levy, co-founders of Slang Worldwide (SLNG), which owns, licenses and markets cannabis brands in 12 U.S. states, said the sector is facing a credibility issue.

“Credibility has become acute in cannabis because there were companies without a ton of scrutiny that became very valuable and had access to capital and became part of a wave that was extremely compelling,” said Miller. “In that sort of controlled chaos, they weren’t looking at things as they should have.”