United States: The Marijuana Industry's Big Win: The DEA's Refusal To Reschedule

Earlier this year, when the U.S. Drug Enforcement Agency (DEA) indicated it would have an announcement regarding a now five-year-old petition to reschedule cannabis, numerous industries on the "outside looking in" were eagerly watching from the sidelines. Leaders in banking, insurance, pharmaceuticals – and just about the entire investing world – were all hoping that marijuana would lose the stigma of a Schedule I drug, a label that meant it had no accepted medical use in the eyes of the federal government. For many in these industries, rightly or wrongly, the Schedule I status of cannabis represented the only obstacle to entering the industry. A rescheduling would have been the green light to enter a growth industry when the market could be on the verge of exploding.

These investors and insurers held dreams of unbridled access to enormous growth potential and revenue streams. When news came in early August 2016 that the DEA would not reschedule, those dreams were dashed. But was the decision bad news? The answer is, "Not really."

In reality, the DEA's decision is a win for existing cannabis businesses and provides comfort for those who are already profiting or already invested in the industry. The smaller businesses, the cultivators, the licensed distributors and the companies financing them or investing in them could find themselves in a more profitable position.

Analysis

Had cannabis been rescheduled, states would have had to wrestle with the tight regulations of the Food and Drug Administration (FDA). In all likelihood, rescheduling would have dramatically increased costs for smaller players, potentially pushing them out of business. Pharmacies would be in a position to sell the product. For example, many of these small businesses thrive on creating their own strains. An FDA review of a product can take years to complete and no one knows particularly to what extent testing would be required.

This is an issue because so many growers, sellers and infusers rely on cross-breeding and these companies take a more active interest in protecting their intellectual property. Would every strain need FDA approval? Every infused product? How would an ongoing FDA review affect a business's ability to sell its product or to market it? How would it affect labeling requirements and the sale of medical strains or products? FDA reviews have been known to cost millions of dollars. Costs would skyrocket to the point that regulatory costs would force many, if not all, small businesses out entirely. Big businesses would be in a position to crush the small businesses. Resale values of the businesses and licenses would decline as a result, as big pharmaceutical companies would have no need to buy out those companies – they could force these small businesses into closure with little to no effort.

Now, states will not have to face the resulting questions about whether to enforce the far more restrictive federal rules of Schedule II – an issue that had the potential to cripple the medical marijuana (MMJ) industry. Schedule II drugs cannot be refilled. A new prescription must be issued in ink and physically presented to the pharmacist every time it is ordered. The 25 states that have allowed marijuana/CBD (one of at least 113 active cannabinoids identified in cannabis) use to various extents would have had to align their laws with the federal requirements. Since the DEA and FDA would be regulating cannabis as a Schedule II drug, preemption claims would have become more viable – unless the states affected adapted to the requirements for Schedule II drugs. Sellers, cultivators, investors, insurers and others in the industry can breathe a sigh of relief in this regard.

The decision wasn't so much the closing of a door as it was an affirmation of the status quo that allowed investors and insurers to put many of their fears to rest. For the foreseeable future, their investment does not have a legal guillotine looming over it controlled by big business or the DEA. The DEA made it clear in the public relations blitz accompanying the announcement that marijuana is simply not on its priority list. The nation is facing a surging opioid epidemic and increases in the use of heroin, fentanyl, meth and cocaine. For now, the DEA ruling changes nothing but rather confirms that a well-regulated cannabis industry will not be its target. There remain no known instances of the DEA prosecuting those who invest in, finance or insure the industry.

Prognosis

Additional good news comes in the form of permitting legitimate research regarding marijuana. While there is some research out there, the vast majority of these so-called studies falls short of the extensive testing and monitoring requirements that the FDA and the DEA have traditionally required.

Yes, state-legal marijuana businesses will continue to be denied the same tax deductions that are afforded to other business (see tax provision 280E), and, yes, businesses, investors and landlords still have some reason to fear a federal crackdown on cannabis cultivation and sale. But so long as states continue to pass strong regulations and businesses stay in full compliance with those regulations, investors and insurers can put aside fears that their investments will lose value in the foreseeable future and that is a win for all.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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