Federal Agency Recommends Rescheduling of Cannabis, But Long Road Ahead Awaits

In a groundbreaking development, a senior official at the Department of Health and Human Services (HHS) released a monumental announcement regarding the federal stance on cannabis prohibition. The HHS has officially recommended reclassifying cannabis from its current Schedule I status, a category reserved for drugs deemed to have a high potential for abuse and no recognized medicinal value, to the less restrictive Schedule III.

This historic declaration marks the first acknowledgment by a major government agency that cannabis has been erroneously categorized as a dangerous substance of abuse. The recommendation follows a nearly yearlong investigation, constituting one of the most comprehensive federal reviews ever undertaken on this subject.

However, the excitement surrounding this announcement should be tempered by the realization that its immediate impact on the cannabis industry may be limited. The Drug Enforcement Administration (DEA) will now conduct its own review and decide whether to adopt the HHS recommendation. It is crucial to note that this move does not legalize marijuana, and state-licensed cannabis businesses will continue to operate in defiance of federal law. Nevertheless, given that President Biden himself called for this HHS review, there is a strong possibility that cannabis could shift to Schedule III within the next year, potentially before the 2024 presidential election.

Looking ahead, the long-term implications for the cannabis industry remain uncertain. One significant and immediate consequence, assuming the DEA follows the HHS recommendation, is that Section 280E of the IRS tax code will no longer apply to cannabis businesses. Section 280E treats state-licensed cannabis enterprises as if they were drug traffickers under federal law, preventing them from claiming standard business deductions available to other American businesses. This change could be a game-changer for the industry, especially as it grapples with price compression and heightened competition, which have eroded profit margins.

While rescheduling will not directly open access to institutional banking and lending, it could attract new sources of capital into the sector, particularly from new lenders. The shift from the most restrictive drug classification to Schedule III sends a clear signal to investors that the federal government is becoming more cannabis-friendly, potentially luring smaller institutions with greater risk tolerance into the market. Additionally, the elimination of Section 280E is expected to stimulate new lending opportunities in a sector where loans currently come with exorbitant interest rates. This change will ease the cash flow burden on cannabis businesses, enabling them to secure financing for expansion and operations.

Rescheduling may also have benefits for publicly traded cannabis companies and their shareholders. Most American cannabis firms trade on the Canadian Securities Exchange (CSE), where trading volumes have stagnated. Shifting cannabis to a less restrictive schedule could entice higher-volume exchanges like the Toronto Stock Exchange (TSX) to consider American cannabis firms. The TSX's hesitancy to list U.S.-based cannabis companies is primarily due to their federal illegality. As cannabis regulations become more lenient at the federal level, the TSX (and potentially even U.S.-based exchanges like NASDAQ and NYSE) may reconsider their policies, potentially welcoming American companies such as Curaleaf, Cresco Labs, Green Thumb Industries, and Trulieve.

Furthermore, this recommendation could catalyze congressional action. Armed with the HHS's endorsement, Congress now has greater political cover to pass bills like the SAFE Banking Act and possibly more comprehensive reform measures. With the HHS recognizing cannabis's medicinal value and reduced harm, proponents of reform in Congress may renew their efforts to eliminate restrictions and penalties associated with cannabis for both businesses and consumers.

While the road ahead is uncertain and full of speculation regarding the precise implications of rescheduling for the cannabis industry, today's announcement has been met with enthusiasm by industry participants and advocates alike. It brings the United States one step closer to a post-prohibition reality, although the journey ahead remains lengthy and complex.