Federal cannabis law just saw its biggest reset since the Nixon era, in a policy reform called rescheduling.
The change moves cannabis to Schedule III from Schedule I under the Controlled Substances Act. The celebrations are over. But it’s worth briefly remembering what a game-changer this is for investors, in the words of a few cannabis company CEOs.
“The U.S. cannabis industry has now entered what we believe is the most important regulatory inflection point in 55 years,” says Curaleaf (CURLF) CEO Boris Jordan.
“This is the first substantive reform that the industry’s achieved at a federal level, ever,” says Cresco Labs (CRLBF) CEO Charlie Bachtell.
Beyond the high-level cultural shift towards cannabis that rescheduling represents, there are several key practical implications for investors.
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The obvious one is the cannabis company cash flow boost that comes from the neutralization of IRS Rule 280E, which bans the deduction of operating expenses against revenue from the sale of Schedule I drugs.
Here are the other key implications for investors, say cannabis company CEOs.
1. Cannabis may now be federally legal, though there’s room for debate here.
As part of rescheduling, companies in the space have to get an operating license from the Drug Enforcement Administration (DEA). This seems like a de facto legal acknowledgment that cannabis companies exist, which may have big implications. “The [rescheduling] order provides that we can get DEA licenses for our medical cannabis businesses, which would make our business fully legal under the Controlled Substances Act,” believes Jordan, at Curaleaf.
2. The change may improve access to banking services.
Jordan at Curaleaf expects rescheduling to help cannabis companies get greater access to banking services. “We and the industry are racing to explore increased access to banking, financial services, and credit card use for our medical cannabis business,” he says.
“Normalized banking relationships, critically the ability to accept major credit cards, would remove friction at the point of sale, improve conversion, lower transaction costs, and continue the normalization of the consumer experience. It would also improve cash management and expand access to credit, representing another meaningful step change in profitability and scalability for Curaleaf.”
Jordan also predicts SAFE Banking legislation, which would codify cannabis company access to banking, will make a comeback in the Senate and get approval there by year end. It has been approved several times in the House.
3. Rescheduling could lead to uplisting on better exchanges.
“I believe that with a federal DEA license, we become a federally legal business, which should give another nod to the exchanges to be able to include us,” opined Verano (VRNO) CEO George Archos.
“There’s nothing in the [stock exchange] bylaws that preclude us from being listed, agrees Verano chief investment officer Aaron Miles. “It’s just the exchanges are choosing not to based on the federal illegality of the product. When you actually start to get more approval and more acceptance at the federal level, you can imagine that it’ll just further strengthen our case. More to come on that.”
4. The reform could bring institutional money into the sector.
Not all CEOs are on board with the notion that rescheduling of medical cannabis makes the plant “federally legal,” since recreational-use sales remain in Schedule I. “Rescheduling of medical cannabis is not full legalization,” says Green Thumb Industries (GTBIF) CEO Ben Kovler. “It’s not full legalization. It might be legalization of some of the product.”
Nevertheless, he thinks rescheduling of medical cannabis may be enough to attract institutional investors. “This opens up a new world of investors to come examine the space. People are getting interested in studying the space. That makes it very interesting.”
But beware of excessive CEO exuberance.
CEOs, however, appear overly optimistic on the prospects for recreational-use cannabis rescheduling. Their timelines are way too short. “We are hopeful the rest of cannabis will be rescheduled later this year,” says Green Thumb’s Kovler. “I think we can tell you at the end of the year all cannabis gets rescheduled. That feels pretty good.”
“Given the expedited timeline and significant body of data that has already been examined, we are optimistic that marijuana rescheduling can be finalized this year,” says Trulieve Cannabis (TCNNF) CEO Kim Rivers.
“When the adult use process concludes, which we expect later this summer, these benefits should extend across the adult use portion of our business as well,” says Jordan at Curaleaf.
The problem here is that these timelines are way too optimistic. The rescheduling of medical use was accelerated by the use of international law provisions to speed up the process. Otherwise, major federal administrative law changes like rec-use rescheduling typically take years to play out.
The other big problem for rec-use rescheduling is that there’s no groundswell of support for it in administration. While President Donald Trump is all in on medical use, he’s skeptical about rec-use. The DEA has a long history of opposing cannabis normalization. Cultural shifts at large organizations like the DEA happen slowly, if at all. Since the DEA will play a key role in rec-use rescheduling, its inherent resistance to cannabis reform may remain an obstacle.
The bottom line: For investors, the benefits of rescheduling medical-use cannabis go way beyond the 280E cash flow boost. It may also bring uplisting, institutional investor interest, and more banking services. But as an investor, you need to be careful about buying into to the rapid rec-use rescheduling thesis. It is not going to happen quickly.
For details on eight other key investor insights from the recent first-quarter cannabis company earnings calls, click here to subscribe to Cabot Cannabis Investor.
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