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The FDA’s recommendation to classify cannabis as Schedule III contained in a 252-page reportwas sent to the U.S. Drug Enforcement Administration (DEA) in August 2023. The FDA assessed medical efficacy use in seven indications: anorexia, anxiety, epilepsy, inflammatory bowel disease, nausea and vomiting, pain, and posttraumatic stress disorder. The report concluded that the strongest evidence existed for anorexia related to a medical condition, nausea and vomiting, and pain. This sets the stage for a transformative shift in the cannabis industry.
According to Pew Research, an “overwhelming share of U.S. adults (88%) say either that marijuana should be legal for medicaland recreational use by adults (59%) or that it should be legal for medical use only (30%).” The interest, shown from data and anecdotes, in updating federal cannabis law is something politicians can only ignore for so long. In an election year, rescheduling can be an important tool for garnering votes. In the cannabis industry, rescheduling creates the possibility for a shift that would open up more opportunities for research, production and distribution. The cannabis industry has been rapidly growing in recent years, with more and more states legalizing its use for both medical and recreational purposes.
This memo could be the impetus for policy changes that lead to legalization at the federal level. This week, twelve Democratic senators recommended that the DEA go further by completely removing marijuana from the CSA’s schedules. Their argument is sound as a matter of policy but legally shaky because the CSA incorporates international treaty obligations in a way that bars the DEA from taking that step. Descheduling has always been the goal for cannabis activists, but Schedule III seems more likely.
Anticipation among cannabis industry legal and policy experts is high, with many expecting rescheduling and foreseeing substantial implications. However, uncertainties persist. Cannabis is a young, immature industry. Can current cannabis businesses meet the high standards, like Tylenol, that govern a Schedule III business? Can the federal government, in a timely manner, create rules that allow recreational dispensaries and cultivations to continue operating? Will we see something like the farm bill that the Schedule III is treated uniquely, providing a framework and rules specific to marijuana?
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Schedule III would likely relax the 280E requirement. Under 280E, one analysis showed state-legal marijuana companies paid more than $1.8 billion in excess taxes in 2022 compared to non-cannabis businesses in 2022, MJ research firm Whitney Economics discovered. The federal government is not going to let this money go easily; one possibility is to see a federal government licensing or a specialized tax. 280E often results in tax rates of more than 70% for marijuana retailers in particular. Removing the 280E burden would be a game-changer for the cannabis industry.
At the state level, New York’s market remains hampered by ongoing lawsuits, causing significant setbacks. Investment falls short of expectations in states like New Jersey and other emerging markets.
Operators nationwide continue to struggle to find money. The global banking turmoil is squeezing U.S. cannabis companies, exacerbating this struggle with limited funding as regional lenders reduce support and alternative fundraising faces tighter constraints. “What this crisis means is probably the duration of the capital tightness in our space will continue because we’re seeing risk-off mentality,” said Morgan Paxhia, co-founder of cannabis hedge fund Poseidon Investment Management. Election results and the federal reclassification of cannabis are expected to shape cannabis trends and investment activity in 2024.
Rescheduling has the potential to create a myriad of potential outcomes. The only certainty is that 2024 will see major changes in the cannabis industry. Lack of access to capital is likely to lead to more consolidation. Despite current challenges, significant transformations are on the horizon in 2024, and the cannabis landscape in 2025 is poised to be markedly different.
