The legal marijuana industry has come an incredibly long way in a short amount of time. At the beginning of the decade, not a single U.S. state had legalized recreational marijuana, and the same could be said for any country around the world. Now, Canada and Uruguay allow recreational weed to be sold, and two-thirds of the U.S. has given the green light to medical marijuana. Having once been a taboo industry, cannabis is now a legitimate business model.

Within the U.S., support for pot is especially strong. Gallup's annual poll, released this past October, found that a record 2 out of 3 Americans favored nationwide legalization. That's double the favorability found as recently as the mid-2000s. As for medical cannabis, a survey from the independent Quinnipiac University in April 2018 found that 93% of respondents supported allowing a physician to prescribe medical weed, with only 5% opposed to the idea.

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Cannabis has been a buzzkill at the federal level

And yet, in spite of this growing support, marijuana remains classified as a Schedule I drug in the United States. This means it's entirely illegal, highly prone to abuse, and isn't recognized as having any medical benefits. Although state-level legalizations are ongoing, the drug still remains entirely illicit at the federal level.

As you can imagine, this can make life difficult for U.S.-based marijuana companies. For instance, they can be subject to Section 280E of the U.S. tax code, which disallows the deduction of normal business expenses, save for cost of goods sold, in any situation where a federally illicit substance is being sold. This can lead to very high effective corporate income tax rates, thereby limiting hiring and business expansion.

Pot businesses in the U.S. also have very limited access to non-dilutive forms of financing. Even though the federal government has maintained a hands-off approach, banks are leery about lending to the cannabis industry for fear of criminal and/or financial penalties, or simply seeing the companies that take their loans be unable to pay them back.

The lack of non-diluting financing options has been especially painful for investors in this space. Upscale cannabis dispensary MedMen Enterprises (NASDAQOTH: MMNFF), having few avenues for traditional financing, has turned to two bought-deal offerings since September. A bought-deal offering involves the sale of common stock to an investor or group of investors to raise capital.

Though MedMen has had little trouble raising money this way, bought-deal offerings are ballooning the company's outstanding share count, which can weigh on shareholders and push down profit per share... when the company becomes profitable. Since Aug. 1, 2018, MedMen's market cap has jumped 216%, but the result of share-based dilution has pushed its stock lower by 8% over the same timeframe.

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