Proposed California Psychedelics Bill Would Be Sector Turning Point

New California bill would legalize the possession of psychedelic substances including psilocybin, LSD and DMT

California, the U.S.’s largest state (by population) has proposed legislation that would decriminalize most psychedelic drugs in the state. That’s significant.

But it’s how this bill would decriminalize psychedelics that should get investors in psychedelic stocks excited. Bill SB 519 would legalize the possession of many psychedelic substances, including psilocybin, LSD and DMT.

Mere decriminalization can be a dead-end in terms of the development of a legal industry. Use of a substance is no longer criminalized, but (legal) commerce is still prohibited.

Indeed, the obvious beneficiary of mere decriminalization of a substance is the black market. Penalties for trafficking are greatly reduced, but legal competition is not allowed.

Decriminalization is (at least) two steps away from a fully legal industry:

  1. Legalizing (normalizing) the use and possession of a substance
  2. Legislating a commercial framework for a legal industry

California’s proposed psychedelics legalization: halfway to legal psychedelics commerce

California’s proposed psychedelics takes the psychedelic drug industry halfway to commercialization. And, arguably, it represents the most important half of the battle.

Once a substance is deemed to be legal, the expectation is that a framework would be put in place for legal commerce with that substance.

With its population of now just over 40 million, legalizing possession of psychedelic drugs in California would be almost as significant as legalizing possession at the national level in Canada (population: 38 million).

It would not be equal to national legalization of psychedelics in Canada, because (as we have seen with cannabis) legalization at the state level does not fully open up a legal industry. However, as with cannabis, the normalization of psychedelic drug laws is being led in the U.S. at the state/local level.

At the same time, investors should be careful not to equate the evolution of the psychedelic drug industry with the cannabis industry.

Momentum building for psychedelic drug legalization in the U.S.

Normalization of cannabis in the United States has largely stalled – primarily due to a lack of political will among the insulated senior citizens of Congress.

In contrast, the psychedelic drug industry already has a very influential advocate in its corner: the U.S. Department of Defense.

The DoD is now the world’s largest individual contributor to psychedelic drug R&D. It has donated $27 million to psychedelic drug research (directly). A U.S. veterans’ organization recently made another research contribution.

The DoD is facing an even more severe Mental Health Crisis than what we see among the general population. With PTSD (in particular) at epidemic levels, the attrition rate in the U.S. military from mental health-related issues is horrendous.

This adds even greater significance to legal reform of psychedelic drugs at the state/local level. Legalizing possession of psychedelics in California would be a turning point for the whole industry.

Combine this with the regulatory support from the FDA: two psychedelics-based therapies have been granted Breakthrough Therapy Designation. We can see real momentum emerging in the United States toward national psychedelic drug reform – and a fully legal psychedelic drug industry.

With MDMA being the lead psychedelic drug for the treatment of PTSD (in clinical trials to date), it is very likely that this drug could be first to be legalized at the national level in the U.S.

Unlike the legalization of other psychedelic substances, the legalization of MDMA can be expected to attract broader support among Washington politicians, because of the importance of MDMA-based psychotherapy in helping the DoD address its Mental Health Crisis.

The other reason for investors in psychedelic stocks to be optimistic about the prospects for U.S. legalization is the corporate support that has emerged for the industry.

Big Business back psychedelics

The corporate media, which remains strongly prejudiced against cannabis and a legal cannabis industry, can’t find enough nice things to say about psychedelic drugs.

Then there is the financial support for the industry.

In the four months immediately following the Compass Pathways IPO, over US$500 million was pumped into the industry by institutions and high-profile investors. Both Silicon Valley and Wall Street are well-represented here.

Add strong financial support for the industry and a friendly media and it becomes much easier to see why more and more investors are becoming interested in psychedelic drug stocks – and why many of these stocks produced spectacular returns in 2020.

Clinical research into psychedelic drugs continues to advance, with spectacular results. The funding is there to take these drugs through the clinical trials process. Now we see political support emerging.

In Canada, Health Canada has been increasing its medical exemptions for legal psilocybin use – and telegraphing its intent to continue liberalizing the rules here.

Despite the huge recent capital flows into the sector, most psychedelic stocks have yet to test their 2020 highs in 2021. These stocks are attractively priced for investors as the investment picture in this space continues to crystallize.

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