Regulatory troubles in Canada, like cannabis producer CannTrust's, could complicate legalization efforts in the U.S., according to Cowen analysts.

"Canada is often described as the model that U.S. policymakers are looking at so the more there's problems north of the border, the more that is going to complicate efforts here," Jaret Seiberg, Cowen Washington Research Group's financial services and housing policy analyst, said on a Monday call.

It's been a little more than a week since CannTrust ($CTST) revealed Health Canada flagged it for growing cannabis in unlicensed rooms in its Pelham, Ontario, facility. A CannTrust spokesperson confirmed that between the months of October 2018 and March 2019, the company grew cannabis out of five rooms that had pending licenses with Health Canada. The rooms were officially licensed in April, but not before the cannabis previously grown there was shipped and sold.

"The decision to grow in the unlicensed rooms was an error in judgement and we take full accountability," a CannTrust spokesperson said, adding that the company takes very seriously charges from Health Canada against it. "We are taking these observances very seriously, and we are working closely with Health Canada and our internal teams to implement new processes and a company-wide re-training program."

Amid an investigation by Health Canada, CannTrust has halted sales of its cannabis and products. Although CannTrust's regulatory snag does not directly impact U.S. cannabis supply, Seiberg reiterated that any turbulence in Canada's nascent industry could be cause for concern for its neighbor to the south.

"So far it hasn't really bled into the legislative push in the United States. That said, it is something that we are likely to hear more about," Seiberg added on the Monday call.

Hadley Ford, CEO of iAnthus Capital, one of the top multistate operators in the U.S., said CannTrust's scandal and others like it exacerbate fears that holdovers from the black market are running legitimate cannabis businesses.

"People see something like that and they say this is exactly what we were afraid of in this business that you are bringing in a bunch of people who haven't run big businesses before, don't comport themselves in a manner that is conducive to being a public company," Ford said. "Once regulators and politicians start thinking that way, sand in the gears."

Canada's woes aside, there are other forces at work undermining U.S. cannabis legalization efforts, which is why Seiberg projected the U.S. may not see "substantive legislation" for several years yet.

"Even in the House, where support is high for cannabis legalization, there still has not been a floor vote on something as narrow as the SAFE Act, which would free banks to service the cannabis industry," Sieberg said. "It also doesn't help that cannabis advocates in the industry and on the Hill cannot unite behind a single measure. Instead there are dozens of bills, which further complicates the process of enacting any of them into law."

In a recent note, Cowen analysts noted lack of traction on the aforementioned SAFE Banking Act "raises the question of whether anyone in Democratic leadership is a real advocate for the Legislation." The bill underwent a full markup by the House Financial Services Committee, before passing 45-15, but has yet to make it to the House floor.

A recent House Judiciary subcommittee hearing put on display discord among those in favor of legalization. During the historic hearing, members of Congress debated, not whether to legalize, but how best to do it. There was support on both sides of the aisle for various bills passing through Congress, as well as for broad legalization and decriminalization, but there was little agreement on how best to get things done. The Strengthening the Tenth Amendment Through Entrusting States Act, for example, which proposes amending the Controlled Substances Act to exempt businesses and individuals in the cannabis industry that are complying with local law, is perhaps the most popular bill under consideration. But even the STATES Act lacked support from several lawmakers and advocates, because it does not include social justice provisions.

On Cowen's call, Seiberg reiterated that lack of movement, whether in the House or from the Food and Drug Administration, which is attempting to regulate the hemp-derived compound CBD, are just more examples of the slow pace of government.

"To us this goes back to the old mantra that nothing in Washington happens quickly, absent a crisis. And we don't have a cannabis crisis," Seiberg said.

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