The US Drug Enforcement Administration (DEA) has initiated proceedings to reclassify cannabis from a Schedule I substance to a Schedule III substance, marking a significant step towards cannabis reform in the country.
Read on for a closer look at the impact that the rescheduling of cannabis could have for companies and investors.
Prior to implementing the rule change, the DEA needs to review all of the comments submitted during the 60 day comment period. If a hearing is requested, the administration must conduct one.
The DEA will issue a final ruling after the comment period closes and any requested hearings have concluded. The entire process may span a few months or more, based on the progress of the comment period.
Even after cannabis is rescheduled, it will still be subject to a dual regulatory framework. The DEA will regulate and distribute licenses for the cultivation, distribution and possession of cannabis, while the Food and Drug Administration (FDA) will be responsible for regulating the production, labeling and marketing of cannabis products.
The DEA’s regulations for cannabis will also focus on preventing the diversion of the drug to the illicit market. In addition, cannabis will remain on the DEA’s list of controlled substances.
The FDA’s regulations for cannabis will focus on ensuring that cannabis products are safe and effective for consumers by requiring that they undergo clinical trials to demonstrate their safety and efficacy. The FDA will also set standards for the labeling and marketing of cannabis products, including warning labels requirements and child-proof packaging.
In correspondence provided to INN, Michael Teller, chief operating officer at the Panther Group, highlighted the positive implications of rescheduling for both investors and businesses in the cannabis industry.
“Looking at it from an investor’s viewpoint, the decision to reschedule cannabis would be a major game-changer. Even as the news trickles down, it starts to bring a sense of comfort and confidence to the investment scene, finally pushing the cannabis industry closer to widespread acceptance,” he wrote. “With this impending change, more opportunities like mergers and acquisitions and consolidation will become increasingly available. In addition, businesses struggling to break even can now see a path to profitability, thanks to fewer tax headaches like 280E.”
Limited access to banking products like business loans and payment services further complicates matters, and many operators have had to make concessions such as raising prices, often driving consumers to the black market.
Tritt concurred with Teller on the benefits rescheduling could provide for cannabis businesses.
“Companies are going to become more profitable and have more cash because of the 280E improvement. In terms of the trickle-down effect, I think companies that are doing well will start to have a better financial position,” he said.
In contrast, those facing financial challenges may be more inclined to sell their assets, particularly if they have the opportunity to engage in transactions with financially secure enterprises. “I think you’ll also see similarly that the struggling people aren’t going to really be impacted that much by this change; it’s not going to make their business worth a lot more or make a lot more money. I think people will kind of get fatigued and just kind of give up.”
Rescheduling is also expected to bring other benefits for cannabis businesses in th eUS.
One critical aspect is the availability of trademarks for cannabis brands and products. “With the transition from Schedule I to Schedule III, cannabis brands and products will have significantly more opportunities for federal trademarks and IP protection, thus increasing a brand’s value and relationship with its consumers,” Tritt told INN.
Currently, the Patent and Trademark Office refuses to register any trademark used in connection with unlawful goods or services. Rescheduling cannabis for medical purposes would allow it to be legally trademarked, enabling those in the medical aspect of the industry to obtain brand protection.
“So I think you’ll start to see companies developing products and formulations and different things to treat certain maladies (and) effects, and the way that they’re going to protect and make sure that what they’ve created has a brand is by using the normal protections that are afforded to businesses,” said Tritt during the interview. “It just allows the normal course of business to occur, which hasn’t been the case for cannabis.”
Until now, research on marijuana’s potential medical properties has been limited due to its Schedule I classification.
Reclassifying cannabis to the Schedule III category would open the door to opportunities to conduct more thorough research into its benefits and identify further tangible uses.
However, Tritt highlighted the potential new challenges that could come with this transition.
“The exit for these cannabinoid businesses is to pharma, so we need to understand what they’re acquiring and what it takes to get them interested — the studies that they need in order to get comfortable with it. That’s what the industry is going to start being faced with,” he explained to INN. “Like everything in this industry, I could see it going totally sideways and people going down a path and then not realizing (they) can’t even get protection for (something), so it creates a whole other set of challenges for an industry that operators have never dealt with. It makes picking the right team that much more critical at this point than it ever has been, just because now the stakes are getting really serious.”
Although the NPRM is a significant step forward for cannabis rescheduling, some experts have raised concerns.
The bill will expire on September 30, and a proposed amendment seeks to federally ban all ingestible hemp products containing any level of THC. This could have a significant impact on the hemp industry.
“There’s a lot of education that still needs to happen. And so we’re paying attention to trends and opportunities where you may get access to mainstream consumers not through the regulated cannabis channels, and brands are going to ultimately develop through those channels as well. So there’s some crossover with brands and things … but it’s in flux because of the Farm Bill. That would change the dynamic significantly.”
Overall, the rescheduling of cannabis is a complex issue with both potential benefits and challenges.
“At the end of the day, having the ability to clearly see where cannabis will be housed for the foreseeable future allows us to have visibility into the medium to longer-term investment horizon,” said Tritt.
“The legal and regulatory shift of cannabis will influence the international community. The US is signaling that cannabis isn’t going anywhere (except higher, pun intended). As such, investors and companies from industries like pharma, alcohol, tobacco, etc., can now begin mapping the industry trajectory and the various implications.”
Only time will tell how it will ultimately impact the industry.
Securities Disclosure: I, Meagen Seatter, hold no direct investment interest in any company mentioned in this article.
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