Pot firms surge as US move to ease curbs sparks hopes of legalization

General view shows cannabis plants at Yammouneh

(Reuters) -Shares of marijuana companies jumped as much as 37% in morning trading on Thursday after a U.S. health agency's proposal to reclassify it as a lower-risk substance boosted expectations of legalization at the federal level.

Nearly 40 U.S. states have legalized marijuana's use in some form but efforts at the federal level have hit a wall, leaving some investors cagey and the sector dependent on non-traditional sources for funding.

"A move to Schedule III would eliminate the onerous tax treatment of U.S. MSOs, and represent a major legitimizing event for the industry that could draw participation from institutions and strategic investors who have hitherto largely been sidelined by its Schedule I status," said Eight Capital analyst Ty Collin.

Shares of cannabis firms Cronos Group, OrganiGram Holdings, Aurora Cannabis, Canopy Growth jumped between 6% and 25%.

Verano Holdings, Green Thumb Industries, Cresco Labs and Curaleaf Holdings and Goodness Growth rose between 15% and 37%.

Pot stocks tracker AdvisorShares Pure US Cannabis ETF soared nearly 17%. It closed 21.2% higher on Wednesday following the news, clocking its best day since Oct. 6, 2022.

The U.S. Department of Health and Human Services (HHS) has made the recommendation to the Drug Enforcement Agency, which has the final authority on rescheduling and will now initiate its own review.

The SAFE Banking Act, a crucial legislation that would make it easier for the cannabis industry to access banking services, has failed to secure a Senate vote despite the House of Representatives passing it seven times.

"Certainly moving cannabis off of Schedule 1 is the right decision and long overdue. Though a full descheduling would be preferred and likely most appropriate for cannabis," said Patrick Rea, managing director of venture capital firm Poseidon Garden Ventures.

The firm held investments in cannabis retailer and producer Green Thumb, and cannabis data platform Flowhub, according to its website.

(Reporting by Arunima Kumar in Bengaluru; Editing by Sriraj Kalluvila)