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BREAKING: The HHS is calling for marijuana to be rescheduled

The U.S. Department of Health and Human Services (HHS) is recommending that cannabis be moved from Schedule I to Schedule III.

white concrete building

How’s this for a Wednesday news dump?

A top official at the Department of Health and Human Services (HHS) called for cannabis to be moved from Schedule I to Schedule III in an August 29 letter addressed to Drug Enforcement Agency administrator Anne Milgram, as first reported by Bloomberg.

The HHS called for the rescheduling of cannabis under the Controlled Substances Act from the most restrictive — Schedule I drugs are considered those with a high potential for abuse and no medical use — to Schedule III, which includes widely used drugs like cough syrup.

While the DEA has the final say, the move, if it goes through, could pour rocket fuel on the growing cannabis industry.

President Biden called for the federal government to review cannabis’s federal status last year, in an effort to fulfill a long-held campaign promise.

Here’s why this is a big deal, even if it seems incremental:

  • I’ve been covering the fits and starts of federal cannabis reform for a long time. Believe me — as a pure signal, this is a big deal for the industry.

  • It’s the first clear action on cannabis policy from the Biden Administration, outside of a handful of pardons, signaling that the federal government may be more open to cannabis reform than observers (and myself) expect.

  • As a Schedule I drug, cannabis companies are subjected to the 280E tax which disallows them from deducting regular business expenses. A move to Schedule III would immediately remove the tax, vastly lowering the effective tax rate that has hamstrung the industry’s growth.

    • Margins would be immediately boosted for cannabis companies as a result.

  • A move to Schedule III would also likely make banks more willing to work with the industry, potentially reducing the need for legislation like the SAFE Banking Act which has struggled to gain traction in Congress despite being introduced 9 times, by my count.

    • It wouldn’t completely solve the banking problem, but it would open a lot of doors that have been slammed shut for cannabis companies.

    • It may also open the door for US cannabis companies to list on major US exchanges — providing much-needed liquidity and a far wider investor base for these companies. There’s a lot of growth capital on the table.

    • It could also mean cheaper loans available for social equity entrepreneurs, and perhaps open the door for federal support for state-level cannabis equity programs like New York’s, if banks are willing.

  • As you could probably imagine, the news has sent cannabis stocks soaring — and they’ve needed a boost.

    • MSOS, an exchange-traded fund that tracks a basket of US cannabis stocks, is up over 20% and there has already been a trading halt today.

Editor’s note: This is a breaking story and I thought it’d be useful to provide you all with a quick analysis. I’ll have much more reporting for you next week, and I’ll look to answer some questions about the specific impacts of the shift in terms of banking, taxation, and US listings. If you want to chat, please reach out.