On Oct. 17, 2019, a number of Mexican Senate committees unveiled draft legislation that would make our neighbor to the south the third country worldwide, after Uruguay and Canada, to legalize recreational marijuana. As reported by Canamo Mexico and Marijuana Moment, the 74 article, 42-page draft is similar to a bill proposed last year by Interior Secretary Olga Sanchez Cordero, who was then serving as a senator. However, the current legislation also incorporates bits and pieces of numerous other legislative proposals, and may be further modified by input received from the public.

Here are eight things you should know about Mexico's groundbreaking cannabis bill, which seems to be very close to becoming law. 

1. It's sort of a formality

To begin with, you should understand that Mexico's push toward adult-use legalization is really just a formality at this point.

You see, Mexico's Supreme Court ruled last year that a ban on the recreational use and possession of cannabis was unconstitutional. This was the fifth time that Mexico's highest court had reached a similar verdict. In Mexico, when the Supreme Court reaches a similar verdict five time, it becomes the set standard. Thus, recreational marijuana has already, in theory, been legalized by the Mexican Supreme Court. It's simply a matter of lawmakers drawing up the rules and regulations that'll govern the industry by putting pen to paper.

2. You only need to be 18 to buy and possess recreational weed in Mexico

One of the most glaring differences you'll see between Mexico's legislation and select U.S. states and Canada is that the minimum age of purchase and possession is slated to be set at only 18 in our neighbor to the south. Mexico has a considerably larger population than Canada (127.6 million versus 37.4 million), and the fact that adults three years younger in Mexico could potentially become consumers might make the Mexican market all that more attractive to the pot industry.

3. Consumption can only occur in private

As should be little surprise, the initial draft calls for the consumption of recreational marijuana to occur only in private spaces. This is consistent with pretty much every U.S. state and Canada. Although the first cannabis café opened in West Hollywood, Calif., just three weeks ago, pot cafes and other non-private places of consumption are a rarity, and it's likely to remain that way for the foreseeable future throughout North America. 

4. Packaging regulations will be strict

Also consistent with the message that's being sent throughout legalized North American markets, Mexico's recreational weed legislation calls for packaging to be nondescript, and for no real people or fictional characters to appear on that packaging. Mexico, like Canada and the U.S., is trying to use these tough regulations to (pardon the pun) weed out illegal production, as well as discourage adolescents from being lured to cannabis products.

5. Edibles and infused beverages are for medical patients only

Arguably the most interesting aspect of Mexico's recreational marijuana draft legislation is that it would only allow for medical marijuana patients to purchase edibles and cannabis-infused beverages. That's meaningful from an investment perspective given that derivatives almost always bear considerably higher margins for growers than dried cannabis flower. Medical marijuana has been legal in Mexico since June 2017.

6. The Cannabis Institute will oversee the Mexican pot industry

Similar to the setup in Canada, a central agency, known as the Cannabis Institute, will be responsible for overseeing Mexico's marijuana industry. The Cannabis Institute would be delegated with setting potency limits for recreational weed, implementing whatever legislation is passed, and issuing cultivation and/or sales licenses. Surprisingly, Health Canada has proven to be more of a crutch than an aide in the early going for the Canadian pot industry, so it'll be interesting to see how well the Cannabis Institute performs, assuming this is, indeed, the legislation that becomes law in Mexico.

7. Big businesses won't have licensing priority

Another important thing investors should know is that major North American cannabis businesses aren't going to be given priority in terms of being awarded licenses. The draft legislation calls for low-income individuals, small farmers, and indigenous peoples to have licensing priority in Mexico. This is likely being done to ensure that Mexico's economy, and not foreign companies, benefit most, as well as keeps the Mexican recreational market as competitive as possible.

8. The timeline to pass this bill may not be met

Finally, understand that while the Mexican Supreme Court set a deadline on lawmakers to pass a recreational cannabis bill, it's possible that, even with this legislation in hand, passage is delayed. Even though lawmakers are aiming for approval this week, they may need to appeal to their country's Supreme Court for an extension. Without any precedent, it's unclear whether the high court would grant one.

Mexico may have big market potential, but cannabis stocks may look elsewhere

Assuming Mexico's lawmakers like what they see from this draft and choose to legalize recreational cannabis before the end of the month, the State of the Legal Cannabis Markets report from Arcview Market Research and BDS Analytics suggests that $1 billion in annual sales could be possible (on a combined basis with medical sales) by 2024. This certainly sounds like a healthy amount of annual revenue that would attract pot stocks.

Aurora Cannabis (NYSE:ACB), for example, acquired Farmacias Magistrales last December. Aurora's acquisition came with access to more than 500 pharmacies and hospitals in Mexico, as well as a 12,000-square-foot pharmaceutical processing and production facility in Mexico City. Farmacias is also the only company licensed to import raw materials containing more than 1% tetrahydrocannabinol (THC), the cannabinoid that gets users high.

Similarly, Medical Marijuana, Inc. (OTC:MJNA) has been operating in our southerly neighbor for three years. Medical Marijuana was the first company to import CBD-rich oils into Mexico, and the expansion of the consumer market via this legalization bill would, presumably, open up new opportunities.

But it's important to note that Mexico isn't prioritizing licensing for big businesses, and that it's not allowing adult consumers to buy some of the highest-margin derivatives. That makes the recreational market a less-than-stellar option for Aurora Cannabis and Medical Marijuana. While the two are likely to continue focusing on the medical side of the equation in Mexico, where high-margin derivative products can be sold, the recreational market might be best off avoided by pot stocks.

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