California’s 2026 cannabis M&A activity will unfold as three distinct regulatory shifts begin to converge: (1) President Trump’s December 2025 executive order directing federal marijuana rescheduling, (2) Congress’s November 2025 redefinition of hemp that bans most intoxicating hemp products, and (3) California’s AB 8 integration of hemp-derived cannabinoids into the licensed cannabis framework. Recent industry transactions—including Wyld’s acquisition of Grön, Sunderstorm’s purchase of Lime, KEY Investment Partners’ receivership acquisition of BellRock Brands, and Vireo Growth’s absorption of Eaze—suggest a resurgence in M&A activity this year. However, while these federal and state policies are set to create structural conditions favoring consolidation, significant headwinds persist, and pricing dynamics underscore ongoing competitive pressure. [1] [2] [3] [4] [5] [6]
Federal Rescheduling: Eventual Cash Flow Improvement, Not Immediate Transformation
President Trump’s December 18 executive order directs the Justice Department to expedite cannabis rescheduling to Schedule III. The order does not itself reschedule cannabis; rulemaking procedures, administrative review, and potential legal challenges remain. Once completed, however, rescheduling eliminates the application of Internal Revenue Code Section 280E, which forces cannabis businesses to pay federal taxes on gross income. Industry analysts estimate this could save a typical dispensary $268,000-$800,000 annually, totaling $1.6-$2.2 billion industry-wide. These improved cash flows fundamentally improve acquisition valuations, but contingent consideration tied to regulatory milestones is likely given rescheduling’s uncertain timeline. [7] [8] [9]
Federal Hemp Redefinition: Closing the Loophole Nationwide
On November 12, 2025, Congress enacted the most significant federal hemp policy shift since the 2018 Farm Bill, fundamentally narrowing what qualifies as legal hemp. The legislation adopts a “total THC” standard (not just delta-9 THC) capped at 0.3% on a dry weight basis, and more critically, establishes a strict 0.4 milligram total THC per container limit for final products. This threshold bans nearly every intoxicating hemp product currently sold at retail, including edibles, beverages, smokables, and vapes. The law also excludes synthesized cannabinoids (delta-8 THC, HHC, THCP produced from CBD isolate), reclassifying them as Schedule I controlled substances. [10] [11] [12]
The legislation includes a one-year transition through November 12, 2026, during which manufacturers can still operate under the old 2018 Farm Bill framework. After that date, non-compliant products become federal contraband. Bipartisan legislative efforts to delay or repeal the restrictions are underway, and President Trump’s December executive order language suggests administration support for a more permissive full-spectrum CBD framework, introducing regulatory uncertainty. [13] [14] [15] [16] [17]
AB 8 and Newsom’s Final Budget: State Integration Framework with Enforcement Priority
Governor Newsom signed AB 8 on October 2, 2025, establishing a phased integration of hemp products into California’s licensed cannabis market. Interim provisions effective January 1, 2026 prohibit intoxicating hemp sales outside licensed channels, ban hemp flower and pre-rolls entirely, extend the 15% excise tax to hemp products, and bar tobacco retailers from selling cannabis or hemp. The full integration framework takes effect January 1, 2028, requiring all intoxicating hemp products to enter state-licensed channels with full MAUCRSA compliance—testing, track-and-trace, licensing, and age verification. [18] [19] [20] [21] [22]
Governor Newsom’s January 2026 proposed 2026-27 budget—his final as governor—reflects continued prioritization of cannabis enforcement despite facing a $2.9 billion state deficit. The budget specifically funds the integration of hemp into California’s cannabis regulatory framework and provides resources to the Department of Cannabis Control for expanded enforcement against illegal operations. The DCC reported that AB 8 implementation would cost approximately $2.5 million in fiscal year 2026-27 and $5.8 million annually in ongoing costs. The budget also supports regulatory oversight, tax compliance, and enforcement activities related to hemp-derived products at the California Department of Tax and Fee Administration. [18] [23] [24] [25]
Critically, the budget proposes expanding enforcement against the illegal cannabis market, including establishing a dedicated sworn officer presence in Northern California, and increasing legal staffing to address growing licensing and compliance workload. The budget projects Cannabis Tax Fund revenues of $403.9 million for 2026-27, allocated 60% ($242.3 million) for youth education, prevention, and substance abuse treatment; 20% ($80.8 million) for environmental cleanup and enforcement related to illegal cultivation; and 20% ($80.8 million) for public safety-related activities. This allocation structure reflects the state’s continued emphasis on enforcement even as the licensed market struggles with price compression and illicit market competition.
Governor Newsom’s prior May 2025 revised budget had proposed significant structural changes to DCC enforcement funding, shifting it from the Cannabis Control Fund (which faces a structural deficit nearing $50 million annually) to the Cannabis Tax Fund to avoid imposing a 40% licensing fee increase on legal operators. The Cannabis Control Fund’s structural deficit—driven by declining license counts and rising operational costs—creates fiscal pressure that could further destabilize the licensed market absent alternative funding mechanisms. The 2026-27 budget maintains $15 million in Cannabis Equity Grants Program funding through the Governor’s Office of Business and Economic Development, with local jurisdictions eligible for up to $3.5 million per grant to assist equity applicants and licensees. However, program implementation challenges persist: Richmond was forced to return $1.1 million of a 2021 grant in 2023 for failing to meet reporting benchmarks, and a California State Auditor report found that DCC closed out six jurisdictions and returned $4.1 million to the General Fund due to noncompliance. [26] [27]
The interaction of AB 8, federal hemp policy, and state budget priorities is significant: California’s state-level prohibition (effective January 1, 2026) plus the federal ban (effective November 12, 2026) create dual enforcement that closes multiple competitive pathways, but the state’s fiscal commitment to enforcement and regulatory infrastructure signals that compliance costs for licensed operators will remain elevated. The California Department of Public Health estimated that banning intoxicating hemp would cause 115 business closures and eliminate 18,400+ jobs, but licensed cannabis operators would gain $69.8 million in revenue and 232 jobs. [18] [28]
California’s Market Reality: Production Growth Amid Pricing Pressure and Fiscal Constraints
California presents a paradox for M&A assessment. As of February 2025, inactive licenses outnumbered active ones (10,828 inactive versus 8,514 active), with cultivation licenses declining 43% over three years. Yet licensed cannabis production increased 11.8% in 2024 to 1.43 million pounds, with retail sales totaling approximately $4.7 billion. December 2025 sales reached $348 million, up 0.6% year-over-year and 4.9% month-over-month, suggesting stabilization after a period of contraction. The explanation: consolidation. Remaining operators cultivated at larger scale with improved efficiency; 1,071 inactive licenses resulted from administrative consolidation of multiple small licenses into single larger operations. [29] [30] [31] [32] [33]
However, pricing dynamics reveal persistent competitive pressure. California’s average retail price per item edged down to $18.41 in December 2025, reflecting ongoing price competition and consumer sensitivity. National wholesale cannabis prices continued compressing through early 2026, with the U.S. Cannabis Spot Index at $1,007 per pound ($2.22 per gram) as of January 16, 2026—a 6.1% weekly decline. California retail flower prices remain among the lowest nationally: retail eighths averaged $23.80 (approximately $6.80 per gram) as of Q2 2023, down 32% from the $35.23 peak in Q3 2020. Full ounces averaged approximately $74 at retail entering 2025, compared to $257 in Illinois and over $300 in New Jersey and Connecticut. [33] [34] [35]
Research from UC Davis documents that California’s wholesale prices—some of the lowest in the nation at approximately $150 per pound for cultivators—reflect the state’s role as a supply hub for illegal interstate commerce. Only 20-30% of cannabis consumed in California comes from licensed channels, with approximately 60% sourced from unregulated sources. The Cannabis Control Fund’s structural deficit underscores the fiscal challenge: excise tax collections totaled $600 million in 2024, falling short of the $670 million annual benchmark, yet the illicit market captures more than $1 billion in uncollected excise tax revenue annually based on consumption patterns. The industry faces approximately $6 billion in debt coming due by the end of 2026, with the top five multi-state operators owing $3.4 billion. [32] [36] [37] [38] [39]
Early 2026 M&A Activity: Distress, Receiverships, and Strategic Repositioning
Recent transactions reveal a pattern of opportunistic consolidation, distressed asset purchases, and receivership acquisitions rather than strategic growth combinations.
KEY Investment Partners’ Acquisition of BellRock Brands exemplifies the distressed M&A environment. On January 11, 2026, KEY Investment Partners announced it purchased BellRock Brands out of receivership for an undisclosed sum, securing all brand assets and providing working capital to refocus and revitalize the portfolio under the newly formed MM Brands. BellRock Brands, a Denver-based multi-state operator focused on consumer packaged goods, was placed into receivership in March 2024 following breach allegations by senior secured creditors. The portfolio includes iconic brands: Mary’s Medicinals (transdermal patches, topicals, tinctures), Dixie Elixirs (edibles and beverages), Rebel Coast, Défoncé, Mary’s Nutritionals, and Mary’s Tails (pet CBD products). [1] [2] [3] [40]
Former Curaleaf CEO Joe Bayern was named CEO of MM Brands, bringing over 20 years of leadership experience including executive roles at Dr. Pepper Snapple Group and VOSS of Norway before serving as President and later CEO of Curaleaf Holdings. Bayern stated that MM Brands’ mission is “to improve people’s lives through the use of cannabis” and emphasized building on Mary’s Medicinals’ legacy as “the most trusted brand in cannabis”. KEY Investment Partners’ founding partner Jordan Youkilis characterized the acquisition timing as optimal: “The growing consumer interest in wellness products combined with the potential for cannabis rescheduling on the horizon makes this the perfect deal at the perfect time”. MM Brands will operate under an asset-lite, brand-focused model to build nationally recognized category leaders, with products currently available in 11 markets including California, Michigan, Missouri, and Maryland. [1] [40]
Sunderstorm’s acquisition of Lime, announced January 7, 2026, exemplifies strategic brand consolidation amid target company distress. Lime generated $14.5 million in retail sales during 2025 with 0.1% California market share but experienced a 30% year-over-year decline. Sunderstorm CEO Cameron Clarke framed the deal as “execution, not hype,” emphasizing that “the next chapter of cannabis will be defined by execution, not hype”. Wyld’s acquisition of Grön (two Pacific Northwest edibles brands) lacks disclosed valuations. Vireo Growth’s acquisition of Eaze at a price “less than what its lender paid ~16 months earlier” and Millstreet Credit Fund’s outbid of Curaleaf’s $110 million offer for Cannabist Virginia assets both reflect financial investors converting distressed debt into equity control. [4] [5] [41]
Strategic Implications: Execution Within Fiscal and Regulatory Constraints
The combination of federal rescheduling momentum, hemp redefinition, AB 8 implementation, and Newsom’s enforcement-prioritizing final budget creates genuine opportunity for California cannabis M&A—but only for participants with operational execution capabilities and realistic expectations about persistent challenges. The November 2026 federal hemp deadline creates a specific acquisition window for hemp brands. The dual elimination of regulatory arbitrage (state and federal) improves competitive positioning for licensed operators. However, the persistence of illicit market competition (60% of consumption remaining unregulated), continued price compression ($18.41 average item price, $1,007 per pound wholesale), the Cannabis Control Fund’s structural deficit requiring ongoing fee or funding adjustments, and regulatory uncertainty from bipartisan legislative efforts to reverse the hemp ban all suggest that regulatory improvements, while material, are insufficient to fundamentally transform economics without strong operational execution. [33] [35]
The BellRock/MM Brands transaction illustrates this dynamic: KEY Investment Partners acquired a distressed portfolio with established brand equity at receivership valuations, installed an experienced operator with major MSO credentials (former Curaleaf CEO), and positioned the platform to capitalize on rescheduling and wellness trends. Success depends not on regulatory change alone but also on this CEO’s ability to execute brand revitalization, secure favorable licensing and manufacturing partnerships across 11 states, and differentiate in a price-competitive market where California ounces retail for $74 while wholesale prices compress to $1,007 per pound nationally. [3] [42]
For operators considering acquisitions, clarity about strategic positioning is essential. As Sunderstorm’s CEO observed, “the next chapter of cannabis will be defined by execution, not hype”. For disciplined, well-capitalized participants who understand market dynamics, regulatory frameworks, fiscal constraints, and operational realities, 2026 presents genuine opportunity—but only for those who approach this environment with analytical rigor rather than speculative exuberance. [5]