DEA reportedly moves to reclassify marijuana, Cannabis stocks surge
DEA reportedly moves to reclassify marijuana, Cannabis stocks surge
To end the trading day on 4/30, ETF $MSOS gained +24.8% while other publicly traded cannabis companies gained +13.7% (Cresco Labs) to +78.9% (Canopy).
On April 30, 2024, The Associated Press reported that the U.S. Drug Enforcement Administration (DEA) will move to reclassify marijuana as a less dangerous drug (moving it from Schedule I to Schedule III). Schedule I drugs include heroin and LSD, while Schedule III drugs include ketamine and anabolic steroids. The proposal must still be reviewed by the White House Office of Management and Budget (OMB), would recognize the medical uses of cannabis and acknowledge it has less potential for abuse than some of the nation’s most dangerous drugs. Once OMB signs off, the DEA will take public comments on rescheduling. After the public comment period and a review by an administrative judge, the agency would eventually publish the final rule.
📈 Stocks climbed sharply to close the day (4/30/24). Even though Canadian stocks had less to gain than U.S. operators given the major exchange listings, they saw some of the largest gains.
Canopy Growth Corporation (CGC) $14.88 (+78.85%), Aurora Cannabis Inc. (ACB) $9.23 (+46.04%), Tilray Brands, Inc. (TLRY) $2.47 (+39.55%)
Cannabis technology companies also gained on the news with Leafly Holdings, Inc. (LFLY) $3.18 (+51.43%) POSaBIT Systems Corporation (POSAF) $0.15 (+33.87%) and WM Technology, Inc. (MAPS) $1.265 (+21.05%)
U.S. Cannabis companies which stand to improve cash flow due to the elimination of 280E: Trulieve Cannabis Corp. (TCNNF) $14.37 (+38.17%), Ayr Wellness Inc. (AYRWF) 3.4100 (+32.17%), Jushi Holdings Inc. (JUSHF) 0.8700 (+31.82%), Curaleaf Holdings, Inc. (CURLF) $6.28 (+24.60%), Verano Holdings Corp. (VRNOF) $6.28 (+24.36%), Green Thumb Industries Inc. (GTBIF) $15.35 (+22.31%), and Cresco Labs Inc. (CRLBF) $2.48 (+13.76%)
📉 MSOs trades at around the same price a week later. The ETF closed at $9.02 on 4/29, a week after the news, it closed $8.89. Volume also quickly came back to typical levels two days later.
💰 Removal of 280E. Cannabis operators will no longer be subject to Section 280E of the Internal Revenue Code, which prohibits businesses from writing off standard business expenses when calculating their pre-tax profits. According to law firm Vicente, It is possible but unlikely that the IRS will apply 280E relief retroactively or forgive back taxes for cannabis businesses. It is highly likely that shortly after rescheduling is announced, the Internal Revenue Service (IRS) will provide guidance on the practical effects the change will have on 280E and tax filing requirements.
⏳ Timing. The news comes ~18 months after President Joe Biden called for a review of federal marijuana law in October 2022 and moved to pardon thousands of Americans convicted federally of simple possession of the drug. He has also called on governors and local leaders to take similar steps to erase marijuana convictions. In September 2023, HHS recommended rescheduling Cannabis to Schedule III.
BTIG acknowledged that even if the White House were determined to move ahead with great speed, the process could get bogged down for years by legal challenges and lack of clarity on implementation. The firm thinks that an outside party could petition to have an administrative law judge review the proposal, which could delay reclassification by as much as a year. BTIG also sees legal challenges being filed after reclassification, which could drag out the process another two years.
Riana Durrett, Director of the Cannabis Policy Institute at UNLV, also believes litigation challenging the judge’s ruling is also highly likely.
👮♂️ DEA would Regulate. As a Schedule III drug, cannabis would remain regulated by the DEA, which means dispensaries would have to register with the DEA like regular pharmacies and be subject to strict reporting requirements.
🧪 Research. Researchers only access to cannabis for research purposes comes from the federal government. Rescheduling would open new channels for researchers to obtain cannabis and conduct studies on its medical value.
🗣️ News Coverage and Additional Thoughts.
— Reclassifying Cannabis Still Leaves Pot Stocks in Limbo, WSJ (subscription required)
— Reclassifying Marijuana Could Unlock Billions in Tax Savings for Cannabis Companies, WSJ (subscription required)
— Trulieve CEO: There is Broad Appeal for Cannabis Reform, Bloomberg
— DEA’s big marijuana shift could be a lifeline for California’s troubled pot industry, LA Times
— At Last, Washington Realizes the Obvious Truth About Marijuana, New York Times (subscription required)
— DEA's reclassifying marijuana sends signal to DC: Curaleaf CEO, Yahoo! Finance
— Marijuana Rescheduling News, Explained, Harris Sliwoski
— Rescheduling Misconceptions and Responses, Dentons
🗣️ Statements.
“While this rescheduling announcement is a historic step forward, I remain strongly committed to continuing to work on legislation like the SAFER Banking Act as well as the Cannabis Administration and Opportunity Act, which federally deschedules cannabis by removing it from the Controlled Substances Act. Congress must do everything we can to end the federal prohibition on cannabis and address longstanding harms caused by the War on Drugs.” — Sen. Chuck Schumer, Senate Majority Leader of New York
“It is significant for these federal agencies, and the DEA and FDA in particular, to acknowledge publicly for the first time what many patients and advocates have known for decades: that cannabis is a safe and effective therapeutic agent for tens of millions of Americans." — Paul Armentano, Deputy Director of NORML
“Today’s decision by the DEA to reschedule cannabis to Schedule III is one of the most monumental developments that cannabis has seen in years and is a crucial step in undoing the harms caused by the failed and discriminatory War on Drugs. We are thankful to President Biden and his Administration for helping to push this process forward. This ruling reflects evolving attitudes towards the plant, recognizing its well-documented therapeutic value and medicinal applications. It's very clear that the country is ready for this step, given that 92% of Americans are now in support of legalization in some form. As the cannabis industry undergoes regulatory transformations, Curaleaf remains committed to collaborating with regulatory authorities, industry members, and the broader community to ensure the responsible and sustainable growth of the cannabis sector. The future for the cannabis industry is real and we look forward to seeing what 2024 has in store.” — Matt Darin, CEO of Curaleaf
“AYR Wellness applauds the historic proposal by the Drug Enforcement Administration’s to reclassify cannabis from Schedule I to Schedule III, in alignment with the science-backed recommendation made earlier this year by the Department of Health and Human Services. This represents the most significant step towards federal cannabis reform in U.S. history and will provide much needed relief to operators of all shapes and sizes, allowing us fair tax treatment by eliminating 280E, in addition to allowing for additional research into the medical efficacy of cannabis. AYR Wellness, along with many of its peers, continues to advocate for the full de-scheduling of cannabis, and feel today’s news represents positive progress towards that eventual outcome. We will closely monitor next steps on the proposed rule as we move closer to implementation. Thank you to President Biden and his Administration for following through on their commitment to modernize the federal government’s approach to cannabis regulation.” — David Goubert, President & CEO of AYR Wellness
“Acreage strongly applauds the DEA's decision to reclassify cannabis as a Schedule III substance under the Controlled Substances Act. For far too long, restrictive policies have stifled the scientific examination of the plant’s many healing capabilities. With this massive hurdle removed, more research can be done to learn about the medical efficacy of cannabis and the positive impact that it can have on the health and wellness of millions of people across the country. With this monumental move also comes the elimination of 280E, which has burdened cannabis businesses and kept the industry from reaching its full potential. Finally, cannabis operators will be able to compete and operate on a more level playing field with other businesses in the country.” — Dennis Curran, CEO & Chairman of Acreage Holdings
“The DEA’s decision to reschedule cannabis from Schedule I to Schedule III is a commendable step toward fostering a more progressive and inclusive cannabis industry. This move not only reflects a commitment to evidence-based policymaking but also signals a recognition of the industry's economic potential and its positive impact on job creation. By loosening regulatory constraints, the government will be empowering businesses, encouraging innovation, and contributing to the overall growth and maturation of the cannabis sector.” — Ed Schmults, CEO of StateHouse Holdings
“We are hopeful that this rescheduling finally persuades major financial institutions to work with our industry. Will it pave the way for US operators to finally list on U.S. stock exchanges? Will it enable smaller operators and entrepreneurs the access to capital they desperately need to survive and thrive? Hopefully today’s announcement will speed the long-awaited passage of the SAFE Act and the answer will be “yes.” With it, we should see more established banks and institutional investors finally invest in cannabis businesses, provide loans and credit card services to them, and offer standard banking services to the industry’s employees.” — Jon Levine, CEO and President, MariMed
“We estimate our tenants would collectively enjoy more than $400 million of annual tax savings and related increase to cash flows for their businesses. Furthermore, this important step by the federal government should provide a catalyst for incremental investment into the sector, which we believe would allow operators to recapitalize their balance sheets resulting in further improvement of the industry’s credit quality, including our tenant base. These developments are also likely to spur overall growth across the cannabis industry as the march towards normalization and legalization continues. With less than 0.1x debt/EBITDA, NewLake has ample capacity to capture growth opportunities that will likely come from this important announcement.” — Anthony Coniglio, NewLake Capital Partners CEO and President
“Despite these positive steps forward to the sector and its lending and banking climates, we also believe that certain challenges will continue to persist, particularly in addressing issues with payment networks, leaving the industry predominantly cash-intensive. While substantial changes to the Bank Secrecy Act (BSA) regulations are unlikely at this time due the fact that cannabis remains under the Controlled Substance Act, we expect a reevaluation of BSA regulations sometime in the future. However, this will be driven primarily by the SAFER Banking Act should it pass. Lastly, state-level efforts to combat the illicit market will continue to be essential for supporting the continued growth of the legal cannabis sector.” — Sundie Seefried, Safe Harbor Financial CEO