Proactive Investors - Marijuana is set to be reclassified as a lower-risk drug in the United States which will have wide-reaching implications for the cannabis sector.
The Biden administration in 2022 ordered the initiation of a review of how marijuana is scheduled within the Controlled Substances Act.
The Drug Enforcement Administration (DEA), part of the Department of Justice (DOJ), has subsequently approved a recommendation from the Department of Health and Human Services to reclassify marijuana from the strictest category of the act, Schedule 1, to Schedule 3.
Instead of being classified alongside heroin and LSD, cannabis will instead sit with drugs like ketamine, testosterone, and codeine. The reclassification does not legalize marijuana for recreational use in the US.
“The Attorney General circulated a proposal to reclassify marijuana from Schedule 1 to Schedule 3,” Justice Department director of public affairs Xochitl Hinojosa said in a statement on Tuesday.
“Once published by the Federal Register, it will initiate a formal rulemaking process as prescribed by Congress in the Controlled Substances Act.”
The DEA’s proposal must still go before the Office of Management and Budget for approval which would be followed by a 60-day public comment period.
The publication of a final ruling will take several months but is expected to be done by the time early presidential voting kicks off in September, depending on potential lawsuits being filed to prevent the move by conservative states.
If finalized, here’s what the reclassification of marijuana as a Schedule 3 drug in the US would mean.
Signals new stance on cannabis
The reclassification of cannabis to Schedule 3 recognizes the plant’s medical potential and lower potential for abuse, which would mark a significant shift in the US government’s position on the drug.
Law and lobbying firm Brownstein Hyatt Farber Schreck sees this regulatory shift impacting sentencing guidelines, access to public housing, and cannabis-related banking regulations.
“While reclassifying marijuana from Schedule 1 to Schedule 3 would be viewed as a tremendously positive move by cannabis advocates and a signal that the cannabis industry will soon gain true legitimacy under federal law, Congress still needs to act on the Secure And Fair Enforcement Regulation (SAFER) Banking Act so that cannabis businesses can legally maintain bank accounts and secure loans like any other business,” the firm said in a statement.
“While not legalizing recreational use, this move signifies a significant step forward in reforming America's stance on marijuana.”
Analysts at Jefferies believe the move to Schedule 3 would “hugely improve” the prospects of marijuana achieving full federal legalization in the US within the next five years.
“A critical piece of this move is making it easier to study cannabis and thereby fill in the data gaps where there may be concerns around its widespread use among the population,” the analysts believe.
Removal of tax burden
Most significantly for cannabis businesses, the reclassification of marijuana will eliminate the 280E tax provision which prevents US cannabis operators from deducting ordinary expenses, which results in an effective corporate tax rate above 80%.
It is estimated that the top 10 US cannabis companies would save more than $700 million annually from eliminating 280E.
“If Schedule 3 is finalized this year, 280E relief will be retroactive for 2024 and companies can file for refunds for the prior three years,” Water Tower Research analysts highlighted.
Curaleaf (TSX:CURA) Hldgs Inc. (CSE:CURA, OTCQX:CURLF) executive chairman Boris Jordan told Water Tower Research the removal of 280E would save the company approximately $150 million in 2023 and roughly $175 million in 2024.
Greater institutional ownership
Marijuana’s position in Schedule 3 is also expected to expand the investor base for cannabis companies.
Currently, major stock exchanges are unwilling to list cannabis stocks due to their current drug classification and federal illegality, which result in compliance and legal concerns.
“The top five US cannabis companies are less than 20% institutionally owned, whereas large alcohol and tobacco stocks commonly approach 75% institutional ownership,” the Water Tower Research analysts highlighted.
“While Schedule 3 does not explicitly allow listing on higher exchanges, it is a significant step toward getting US cannabis-touching operators on the NASDAQ and NYSE.”
The Jefferies analysts added: “We think these changes will materially de-risk cannabis from an investment perspective in the eyes of many institutions.”