Cannabusiness Advisory

On August 30, 2023, HHS recommended that marijuana be reclassified by the Drug Enforcement Agency (DEA) as a Schedule III substance under the Controlled Substances Act (CSA), according to Bloomberg. This could have an immediate and positive impact on various aspects of the cannabis industry and many cannabis-related businesses (CRBs) operating throughout the United States.

In the two trading days since HHS’s recommendation was announced, stock prices of many of the largest publicly traded cannabis companies jumped up more than 35%.

Below are a few examples of positive effects this could bring to the cannabis industry, which has been battered and bruised of late, as many companies face a capital market environment of decreased equity valuations alongside an increasing interest rate environment.

• Tax Relief. CRBs would no longer be subject to Section 280E of the tax code, which currently prohibits them from taking any tax deductions, other than cost of goods sold. This could even the playing field for many CRBs, who have long been operating while paying significantly higher effective tax rates than similar businesses in other industries.

• Potential Availability of Bankruptcy Relief. The door could soon be open for CRBs to file for bankruptcy in federal courts. An argument could be made that if the Southern District of New York Bankruptcy Court authorized a Chapter 11 filing in 2019 by Purdue Pharma L.P., which distributed opiates classified as Schedule II and III substances under the CSA, then Schedule III CRBs should also be permitted eligible to file for bankruptcy.

• Opening the Door to Potential Uplisting on Major U.S. Stock Exchanges. It would become increasingly difficult for the major U.S. stock exchanges to bar CRBs from listing while at the same time permitting the listing of companies such as Johnson & Johnson (NYSE: JNJ), the producer of Spravato® (which contains ketamine and is classified as a Schedule III substance).

• Certain Banking Compliance Requirements Could be Eased for Financial Institutions Servicing CRBs. For example, after Hemp was removed from Schedule I of the CSA pursuant to the Farm Bill of 2018, FinCen provided guidance in 2020 stating, in relevant part, that financial institutions would no longer be required to file Suspicious Activity Reports on customers solely because they were engaged in legal and compliant hemp cultivation businesses. Although unlikely, it is possible (though not certain) that if marijuana is reclassified, FinCen could provide similar guidance to financial institutions that service CRBs. .

However, we note that much of the above is conjecture, as comparisons to hemp’s legalization under the Farm Bill are not apt. Hemp was descheduled entirely, marijuana is being rescheduled. Even with rescheduling, technically, the use of marijuana would only be “legal” for federal purposes if purchased with a prescription, even if permissible under state law.

Ultimately, the DEA will have final authority over whether to reclassify Marijuana under Schedule III of the CSA, and such a process could take months under applicable federal rulemaking procedures and potentially subject to court challenge. Nevertheless, and dare we say it – there is a reason for (cautious) optimism. Even if reclassification results only in 280E relief (which of the four positive effects listed above is the most likely to occur), this would be transformative for the industry.