Rescheduling cannabis probably won't change as much as you think

Hi everyone,

I hope you had enjoyable Labor Day weekends!

I certainly did — I’ve been doing a lot of “reporting” from my surfboard. The Atlantic finally woke up and I got lots of water time this weekend, so I’m in a good mood.

And I’ve always loved September. The weather’s cooler, the waves are bigger, and ski season is right around the corner.

Professionally speaking, September is when shit happens for the sprint to the end of the year. People are back at work and the news-flow is a bit more exciting after the August doldrums.

On that note, I’m 1) looking for more advertising partners for this newsletter, so please reach out if you’re interested.

And 2) I’ve got a bit of a freelance budget to work with now, so if you’re writer, or you always wanted to try — pitch away!

You know where to find me.

-Jeremy

Today’s Cultivated is sponsored by the PBC Conference.

PBC Conference is the preeminent payments, banking, and compliance conference for the cannabis industry, held in the heart of Washington DC at the Capital Hilton.

PBC brings together lawmakers, top cannabis regulators, and executives at the biggest cannabis companies to chart the future of the industry.

That’s not PR-speak, I mean it: Last year I spoke at PBC, and even broke some news from the conference floor.

September 21-22 will be the fourth iteration of the conference.

There will be keynotes from Rep. Earl Blumenauer — a longtime champion of cannabis reform in Congress — as well as Jim Cole. You’ll also hear from the head regulators of New York, Illinois, Massachusetts, California, and Oklahoma, among other stellar panelists.

I’ll also be speaking again, and I hope to see you all there!

💡What’s the big deal?

Yes yes, here’s yet another column about the big rescheduling announcement. Sorry.

What happened: To catch you up, 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.

In plain English, cannabis will eventually be moved from Schedule I — drugs the federal government says have no medical use and a high potential for abuse — to the still tightly regulated Schedule III, which includes drugs like codeine and ketamine.

How long that takes is anyone’s guess. The DEA will likely take their time. Based on my reporting, I don’t think this will happen before the end of the year, but I’ve been wrong before.

And like I said last week, it’s a major step despite the debate.

Why it matters: 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.

The more I report — I’ve had countless IRL and DM conversations with experts ranging from lawyers, to investors, to activists (and if I still owe you a call or an email please bear with me, it’s been a deluge) — the more I’m coming to the conclusion that we just don’t know what we don’t know.

Anyone who claims they know exactly what will happen, or anyone that claims the sky is falling, is probably doing a bit more self-promotion than actually contributing to what I think (maybe I’m a nerd) is a pretty exciting policy conversation.

“It’s both historic and it also doesn’t go nearly far enough,” Daniel Shortt, a corporate attorney and cannabis policy expert told me. “Both things can be true.”

I’m not a policy scholar by any means, but I know enough to say all policy is implementation — and implementation is a bargaining process.

This is a living, breathing policy debate, so expect things to change.

So here’s where I’ve landed on what will definitely change:

Federal tax relief

Federal tax relief is the biggest and most definite piece.

• The industry’s hated 280E tax will eventually go away. That will boost margins and make cannabis companies instantly more profitable.

• It’s likely it’ll be replaced by an excise tax, as the federal government won’t want to leave all that money on the table.

• Matt Karnes at Greenwave Advisors has a good analysis on what that tax might look like.

Investor sentiment

The news is, perhaps, a bigger driver of sentiment for public cannabis companies than anything else.

• Cannabis stocks skyrocketed, though perhaps some of that was shorts taking the opportunity to cover.

• Still, it was a much-needed jolt of excitement in a relatively boring summer for cannabis investors.

• Cannabis will, for better or worse, be back on CNBC. Online forums like Reddit’s WallStreetBets will start gambling with ETFs like and other cannabis stocks.

• Do with that information what you will — trade wisely, my friends.

Research

Love or hate the pharmaceutical industry, it’s clear that there will be lots of money ready to research cannabis.

• Keep in mind, there are already cannabis-based drugs on the Schedule, including Epidiolex, an epilepsy drug.

• But I can’t predict how interested major pharmaceutical companies will be in cannabis. They could very well just acquire smaller biotechs working on this stuff rather than do it themselves.

• It’s certainly possible that there will be new cannabis-based drugs, but the drug approval process is slow.

• Researchers of all stripes — pharma, academic, or whoever else — will have much more access to a regulated supply of cannabis and funding to conduct that research.

• Federal agencies and universities, once reticent to fund any kind of research into cannabis, will start to sing a different tune.

• I expect an explosion of peer-reviewed papers into the personal and public health impacts of legalization, as well as medical cannabis and cannabis compounds.

• More more universities and research institutions will dedicate real resources. This is a good thing.

Here’s what we don’t know:

Interstate commerce

People smarter than myself tell me that Schedule III won’t change the fact that state-legalized recreational cannabis sales are still illegal.

• States will still likely choose to legalize cannabis through their legislature or via ballot initiative, and they’ll be free to regulate the industry as they see fit.

• If the federal government hasn’t cracked down yet, experts don’t expect them to do so under Schedule III. Not much has changed from that standpoint — just like recreational codeine, recreational cannabis will still be illegal.

• Attorney General Merrick Garland may issue some sort of memo about this, similar to the Cole Memo that directed the Obama-era Justice Department to keep its hands off of cannabis.1

Finance/banking implications

Yes, banks and major broker-dealers work with pharmaceutical companies that “traffic” Schedule III drugs. But no, a move to Schedule III doesn’t mean that cannabis companies are free to list on major US exchanges and have normalized banking relationships.

• It would open the door to institutions who may already be receptive to cannabis, but don’t expect the barbarians to come storming through the gates just yet.

• Goldman Sachs and the Nasdaq aren’t chomping at the bit. So, investors waiting for that moment, maybe make some other plans, and for activists horrified at that thought, don’t tear your hair out just yet.

Remember, recreational cannabis will still be illegal.

• There will still be a need for legislation like the SAFE Banking Act, which would allow cannabis companies to have regular access to the banking system.

• I imagine the exchanges and big investment banks would still work with cannabis companies on a case-by-case basis, and evaluate each unique deal as to whether it makes financial sense. These are sophisticated organizations.

• It’s also not likely the Small Business Administration will give out loans to businesses flouting federal law, whether that’s Schedule I or Schedule III.

It’s not a concrete step toward federal legalization

A move to Schedule III is not a step toward federal legalization, despite what Sen. Chuck Schumer tweets.

• The federal government may stop there — it’s run by octogenarians after all.

• There is still a need for the SAFE Banking Act and for Congress to pass other cannabis-related bills.

There are legitimate risks in a move to Schedule III for social justice

While this is all quite hypothetical until the DEA actually makes the change, there are legitimate risks to moving cannabis to Schedule III.

Many activists and socially-oriented policymakers and regulators I’ve spoken with in the past few days are correct in their prognostications:

• Moving cannabis to Schedule III will help the industry much more than it will help other aspects of legalization, like social justice, prison reform, and economic opportunity for minorities harmed by the pernicious War on Drugs.

• It may undermine the goals of social equity by allowing big companies to access more capital to monopolize the industry, activists say.

• That’s a real risk, and one that the federal government would be wise to solve, if they want progressive support in the general election.

🌿 Jer’s take

I’m reminded of this quote from the Reagan-era economist Thomas Sowell: “There are no solutions. There are only trade-offs.”

So, prepare for everyone, from all sides, to be angry and disappointed with how cannabis policy evolves. But that might just be how democracy works.

If I could have things my way, cannabis would be “de-scheduled” entirely and regulated like alcohol. It’s clearly less dangerous, and it’s clearly a popular product.2

The ATF could step in and become the primary regulatory agency, and the FDA could regulate where cannabis extracts are used as a food additive.

Simple right? Well, like anything in cannabis, it’s not simple.

Decades of stigma, political polarization, and a lack of credible research often get in the way of common-sense, evidence-based cannabis policy.

That’s obviously not unique to cannabis, but it’s particularly acute in cannabis as a majority of Americans of all political stripes say it should be federally legalized.

But we have to deal with what unfortunately is, and not what ought to be.

And moving cannabis to Schedule III is still an imperfect step in the right direction.

What did you think of this column? Share Cultivated to help me grow.

🕺 People moves

What happened: Marijuana Moment, the blockbuster cannabis policy newsletter founded by Tom Angell, is growing!

Longtime cannabis journalist Ben Adlin is joining Marijuana Moment as a senior editor.

Why it matters: This is an excellent sign for independent cannabis media, and independent media more generally.

Angell said Adlin will help the the small team, which includes reporter Kyle Jaeger, do more enterprise reporting on top of day-to-day news coverage.

I’ll note that Marijuana Moment is entirely bootstrapped and reader-funded.

“One of the best things about independent journalism is that our team can wake up every day and decide what we are going to cover and how we are going to cover it without having to worry about what anyone else thinks — other than the readers, of course,” Angell told me.

🥊 Quick hits

Insurtech is coming for cannabis: Frontier Risk Group, a startup insurance brokerage that serves cannabis companies, closed a $3.1 million seed round led by venture fund Casa Verde Capital.

• The round included investors like Euclid VC, Inter-Atlantic Capital Group, and Bruce Macfarlane.

• Frontier Risk Group was founded by James Whitcomb, the former CEO of Parallel.

Four CEOs of New York’s biggest medical cannabis companies — including Green Thumb Industries, Curaleaf, PharmaCann, and Acreage Holdings — wrote an open letter to New York Gov. Kathy Hochul outlining what they say are the failures of the Office of Cannabis Management and urged the state to open up cannabis licenses immediately.

Former California cannabis regulator Christina Dempsey launched the Cannabis Policy Lab, which is designed to help governments and the public understand cannabis policy.

📚 What I’m reading

Slightly higher times: Biden administration moves to loosen weed restrictions (Politico)

New York’s illegal weed market Is propped up by imported chips that taste like tacos (Eater)

With N.Y. cannabis rollouts paused, the future of the industry dims (New York Daily News)

Rescheduling marijuana is the wrong approach. It should be descheduled entirely (Salon)