What would the reclassification of Marijuana mean for the industry?
The announcement of the call for the reclassification of marijuana's current status has excited industry players, but it hasn't escaped criticism either.
The U.S. Department of Health and Human Services sent on August 29 a letter to Anne Milgram, the Administrator of the Drug Enforcement Agency, calling for the reclassification of marijuana as a Schedule III substance within the framework of the Controlled Substances Act, as first reported by Bloomberg News on Wednesday, August 30.
The DEA confirmed the letter sent from HHS, which will now start its own review.
Marijuana's reclassification is a small step toward full legalization, which would require "de-scheduling" marijuana, meaning the complete removal of the substance from the CSA.
However, moving marijuana's classification from Schedule I—containing high-risk substances like heroin, LSD, and ecstasy—to Schedule III, where drugs like ketamine with lower perceived risk can be legally prescribed, would represent a significant shift for the marijuana industry.
In political terms, the move would give President Joe Biden a partial achievement as he approaches next year's election.
Biden introduced initiatives to mitigate penalties linked to marijuana use in October last year. This included pardoning federal simple possession offenses and encouraging governors to follow suit for state offenses. Furthermore, he requested the HHS secretary and the U.S. Attorney General to assess marijuana's classification, considering its medical applications, abuse potential, safety, and dependence risks.
Moving marijuana to Schedule III would be the most significant federal reform of this substance in modern history. But what would change for the marijuana industry?
Benefits for businesses from marijuana reclassification
Marijuana operators would have preferred complete descheduling of marijuana, allowing for more flexibility to fully capitalize on the sector's potential.
Patrick Rea, managing director at Poseidon Garden Ventures, stated that full de-scheduling is preferable and likely the most suitable option for marijuana. However, Matt Hawkins, founder and managing partner of Entourage Effect Capital, noted that reclassification could substantially transform the landscape for all legal operators nationwide.
In practical terms, the reclassification of marijuana would mainly impact the taxation of marijuana companies throughout the nation.
Brady Cobb, CEO of Sunburn Cannabis, explained that the reclassification would be a massive step forward, validating the medicinal benefits of marijuana.
"The move will also allow for interstate commerce while removing the draconian effects of section 280E of the tax code," he said.
Under Section 280E of the Internal Revenue Code, the federal law stipulates that businesses involved in trafficking Schedule I or II controlled substances, including marijuana, cannot claim tax deductions or credits. Marijuana's Schedule I current status hinders businesses from deducting essential expenses on their federal tax returns. Essentially, marijuana entrepreneurs are required to pay taxes on their entire revenue without the advantage of using business expenses to lower their taxable income. If marijuana were reclassified as Schedule III, this scenario would change, benefiting marijuana companies.
David Goubert, CEO of Ayr Wellness, also highlights that rescheduling will bring many benefits, including creating further opportunities for medical marijuana research and signaling to the criminal justice system that marijuana is not a high enforcement priority.
In fact, Dennis Curran, CEO of Acreage, emphasizes that there is still much work ahead. However, he acknowledges that the announcement indicates the Food and Drug Administration's recognition, which the HHS recommendation is built upon, of the potential health benefits of marijuana.
"We urge the DEA to follow this science-forward recommendation and to take the next crucial step, giving our industry the resources and validity needed to reach our full potential and drive success," he said.
Boris Jordan, executive chairman of Curaleaf, said that the announcement represents a significant political advancement and added, "It's past time" for political leaders "to listen to the voters on this issue," hoping that the reclassification "occurs promptly."
"We will not stop fighting for legislative reform - which is critical for the protection of employees, patients, customers, and businesses around the country," he said.
The news further triggered a positive response in the marijuana stock market, resulting in significant double-digit jumps for major players. In fact, Federal relaxation of marijuana classification could potentially enable major stock exchanges to list marijuana-related businesses and open doors for foreign companies to sell products in the United States.
Critics on marijuana reclassification
However, the reclassification of marijuana would still fail to address other crucial issues regarding the current status of marijuana in the country, and the announcement of the reclassification of marijuana hasn't been immune from criticism.
In a press statement, the Drug Policy Alliance explained that moving to Schedule III wouldn't adequately tackle the serious harms in communities affected by marijuana criminalization. The CSA's control would keep much of marijuana conduct federally illegal. State marijuana programs, both medical and recreational, would stay federally banned, leading to potential arrests. Noncitizens might face deportation for marijuana involvement. Federal arrests and prosecutions would continue, old arrests wouldn't be expunged, and many would remain imprisoned for marijuana offenses. This would also maintain the denial of federal benefits to those with prior marijuana convictions and impede fair competition between small, minority-owned businesses and larger corporations in the marijuana industry.
The Minority Cannabis Business Association notes in a press statement sent by email that although some see progress in the HHS suggestion to shift marijuana to Schedule III, it's crucial to realize that reclassification won't stop marijuana consumer arrests in prohibition states. During his 2020 campaign, President Biden pledged to "decriminalize" marijuana, a promise achievable solely by fully removing the substance from the CSA.
"We urge President Biden to make good on his promise to end arrests for marijuana and fully remove marijuana from the CSA. This is the only way to ensure equity, social justice, and economic opportunities in the cannabis industry," the MCBA's press statement reads.
NORML deputy director Paul Armentano said in a press statement that federal marijuana policy reform should bridge the gap between federal and state laws. Rescheduling marijuana to Schedule III doesn't effectively reconcile the conflict between state legalization and federal regulations, maintaining the divide between state and federal marijuana policies.
"Just as it is intellectually dishonest to categorize cannabis in the same placement as heroin, it is equally disingenuous to treat cannabis in the same manner as anabolic steroids," he said, referencing the substances listed in Schedule III of the CSA.
The timing of when the rescheduling could take effect remains uncertain. However, according to some experts, it might potentially be implemented in early 2024, a few months ahead of the 2024 Presidential elections.
