Finance Docket: The Financial And Business Implications Of Marijuana Reclassification – Above the Law

As of this writing, 38 states have legalized medical marijuana. A total of 24 states have also legalized the drug for recreational use.

Despite the legitimate domestic cannabis market being worth an estimated $30 billion, marijuana remains an illegal controlled substance under federal law. Though the federal government rarely, if ever, prosecutes individuals who operate within the confines of states’ legal cannabis frameworks, marijuana’s current status as a Schedule I drug does have significant implications for the industry.

This will likely change soon. The U.S. Drug Enforcement Administration is set to reclassify marijuana as a less dangerous Schedule III drug under a proposal from the Justice Department. Schedule I drugs — others include heroin and LSD — are considered by the federal government to have a high potential for abuse and to have no legitimate medical uses. On the other hand, Schedule III drugs — examples include ketamine and certain anabolic steroids — often have widely recognized medical uses and pose a lower risk of addiction.

The historic move to reclassify marijuana from Schedule I to Schedule III will be a needed lifeline for struggling legal cannabis businesses. Venture capital investment in marijuana companies has tapered off significantly in recent years: after reaching the $3 billion mark in 2019 with a further $2.7 billion invested in 2020, last year venture capitalists poured only $550 million into legal cannabis. Publicly traded stocks tied to the marijuana industry are far from their record highs, and just days ago, MedMen, one of the most well-known cannabis companies, filed for bankruptcy.

The Schedule III reclassification could help cannabis providers in many ways. It would allow cannabis companies to deduct business expenses on their federal taxes, eliminate many restrictions on cannabis research (possibly expanding medical applications of the drug), and provide protections for medical marijuana consumers who can, at present, still be punished for marijuana use within the scope of employment or housing under the existing federal regime.

Even as it would rectify a number of difficulties, reclassifying marijuana would fail to address several of the most pernicious problems within the legal cannabis industry. The change would not allow for legal interstate trade of cannabis – though it may be the first step toward necessary approval of interstate transfers by the U.S. Food and Drug Administration (marijuana markets in some states have suffered greatly from oversupply). Schedule III status also would leave in place the ban on business with cannabis companies for federally chartered financial institutions. Yet, reclassification may spur Congress into finally approving The SAFER Act, a banking bill specific to the cannabis industry which would expand dispensary access to banking services.

Notably, Schedule III reclassification would absolutely not legalize marijuana nationwide, and a few procedural hurdles remain. To take effect, the proposed reclassification must still make it through the White House Office of Management and Budget, a public comment period, and review by an administrative law judge.

Removing marijuana as a Schedule I drug and placing it on the Schedule III tier will not alleviate all the issues plaguing the legal cannabis industry. From a federal perspective, cannabis is still a long ways from being regulated like tobacco or alcohol. Even so, this change would sever quite a few barriers to business, and would indisputably be the most significant federal action taken with respect to marijuana in a very long time.

Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.