Rescheduling is back on the menu. Maybe?

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RESCHEDULING
🤷 Rescheduling is back on the menu. Maybe?

Driving the news: Cannabis stocks may finally be emerging from the doldrums as Axios reports that President Trump’s December Executive Order to reclassify cannabis from the most restrictive Schedule I of the Controlled Substances Act to the far less restrictive Schedule III may finally come to fruition this week.

The market responds: It’s a much-needed jolt of good news for the sector, which has mostly wiped out investors in recent years. 

The AdvisorShares Pure Cannabis ETF $MSOS ( ▼ 6.65% ), which tracks a basket of U.S. cannabis firms like Curaleaf $CURLF ( ▼ 10.48% ) and Trulieve $TCNNF ( ▼ 0.74% ), rocketed up over 21% on Wednesday on the report. But the ETF peaked at nearly $52 per share in February of 2021 — with today’s boost, it’s trading at $5.20 on Wednesday. So, there’s still a long way to climb.

The cannabis sector, despite the fact that it is composed of multiple companies across the U.S., Canada, and Europe, still mostly trades in lock-step like other emerging sectors. So Canadian companies got in on Wednesday’s action, too: Tilray $TLRY.TSX ( ▼ 1.66% ) shot up about 12%, though it doesn’t sell cannabis in the U.S. directly. Canopy Growth $CGC ( ▼ 4.35% ) is up over 20% and counting, though it, through clever legal engineering, has options to directly acquire U.S. cannabis brands like Wana and firms like Acreage Holdings which control cannabis retail licenses in legal states when it becomes federally permissible. 

It’s possible that Schedule III makes this federally permissible, but we’ll let the lawyers and the exchange regulators sort that one out themselves.

Why it matters: The policy mechanics of this are important. President Trump’s December Executive Order directed the Department of Justice to usher through the reclassification as quickly as possible. But those who’ve watched the space for years will certainly remember that former President Biden did the same in ‘23, and here we are, more than three years later, in the same boat.

It’s also not yet clear what lever the Administration plans to pull. The directive could simply restart the DEA hearings required by federal law to reclassify a drug. These hearings were supposed to occur in January of 2025, but were since delayed. .

Or, it’s possible the Administration pushes to waive the hearings entirely — if the man in the Oval wants it, hopefully he’ll make it happen. Still, rescheduling is not legalization. It will not magically make cannabis available in all 50 states. Nor will it magically solve persistent banking and finance issues for cannabis companies.

Perhaps the biggest win for cannabis firms is cash flow. The 280E tax, which prevents cannabis companies from deducting business expenses, only applies to Schedule I or II drugs. We don’t yet know if cannabis companies will be able to claim refunds this year — though some have certainly tried — but once rescheduling goes into effect, the 280E rule will go away and free up millions.

Let’s hope this time’s the real deal.

-JB

“I can spend a half-million dollars and I can secure 10 licenses, and I can sell each one for $1 million. That’s a great turnaround of capital. That’s the business model. It’s flipping licenses. It’s not selling weed,” attorney Peter Murphy told WHYY in a story about how Cannabis Business Advisors, a consulting firm, preyed on social equity applicants in Delaware.

Read the full story.

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