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In a significant development, the U.S. Department of Health and Human Services (HHS) officially recommended on August, 30, 2023, that the U.S. Drug Enforcement Agency (DEA) reclassify marijuana from a Schedule I to Schedule III drug under the Controlled Substances Act. This recommendation follows President Biden’s directive last year to expedite a review of marijuana’s federal scheduling. The historic recommendation by a top federal health agency aligns with the growing momentum for cannabis reform in the United States, as first reported by Bloomberg News. Now, the decision on reclassification lies in the hands of the DEA.
However, the conflicting landscape of federal illegality and state legality persists in the meantime.
The cannabis industry has faced challenges in recent months, including the impact of COVID-19, an oversupply issue trapped within state borders, plummeting prices, inconsistent state regulations, over-licensing, implementation delays, hefty taxes, and persistent illicit market. Following the announcement, many cannabis sector stocks experience substantial gains, as it seemed to pave a path towards potential de-scheduling, akin to alcohol and tobacco. It’s important to note that U.S. cannabis companies directly involved in cultivation won’t immediately gain access to major U.S. stock exchanges.
But let’s keep it real. Reclassification won’t equate to federal legalization, and the federal enforcement landscape may not change significantly. While it might ease some Schedule I restrictions, it won’t be a panacea for all the industry’s challenges and might raise more questions than answers.
Moreover, cannabis won’t become legal in states that have not authorized medical and adult-use licensed cannabis businesses (already legalized for medica use in over 30 states).
What’s at stake here? Schedule I classification is typically reserved for drugs deemed to have “no legitimate medical use”. Schedule III drugs, on the other hand, are considered to have “a moderate to low potential for physical and psychological dependence” and include substances like ketamine and anabolic steroids.
Any shift away from Schedule I to Schedule III classification appears promising from the industry in general. However, it’s uncertain whether the industry is prepared for the potential ramifications of reclassification to Schedule III.
On the positive side, reclassifying to Schedule III would put an end to the tax woes created by the IRS 280E. Legitimate cannabis businesses could finally claim business deductions and reduce their tax burden (state-level taxation, though, would remain unaffected). This change would not only empower existing state-legal businesses to thrive but also encourage investment and attract new players.
Another significant hurdle is limited access to banking services. Currently, fewer than 800 banks and credit unions serve the industry, and access to credit card payments and loans remains a challenge. The SAFE Banking Act could potentially benefit from reclassification efforts, expediting access to legitimate banking, lending, and merchant services. Nevertheless, it’s unlikely to yield immediate results.
Rescheduling might rekindle capital markets, with investors perceiving lower risk due to federal illegality moving from schedule I to Schedule III. It could also facilitate lenders in securing interests in licensed cannabis businesses.
As of now, due to the absence of federal bankruptcy courts, cannabis companies resort to receiverships filed in state courts. Reclassification might open doors for bankruptcy protection for licensed cannabis businesses, similar to hemp companies.
The impact of Schedule III classification on existing state laws remains unclear, but interstate cannabis commerce would still be prohibited. It could, however, trigger discussions among state legislators about regional markets or interstate transportation.
Reclassifying cannabis to Schedule III could potentially enhance research opportunities. Some concerns have been raised about the possibility of pharmaceutical giants replacing current industry players, benefiting from FDA approval for cannabis-derived drugs. However, it’s not a guarantee they pharmaceutical companies will dominate the market. Now, we wait, pondering the next steps and necessary legislative actions. While the cannabis industry hasn’t been a top priority for Congress, we can hope that the upcoming 2024 election may provide the momentum needed for industry success.
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