January 9, 2024 - As many industry participants know, 2023 was a challenging year for the Cannabis Industry (especially for the "adult use" market). This was true both in existing markets (on the West Coast) and in new markets (like New York). While a handful of new markets came online and showed healthy growth, many mature markets continued to struggle in the wake of increased competition from the "grey" (e.g., illicit) market, and a persisting supply glut that is driving down wholesale and retail prices.
But 2023 wasn't all doom and gloom. Public support for cannabis legalization reached an all-time high as several new states enacted laws legalizing adult-use and medical cannabis. On the federal level, the Biden Administration continued to take steps toward reform, expanding on last year's proclamation pardoning people convicted of federal marijuana possession offenses.
Meanwhile, federal agencies — including, most notably, the Department of Health and Human Services (HHS) — took steps toward potentially rescheduling Cannabis, stoking hopes for 2024. This past year also saw numerous bipartisan cannabis bills filed in Congress (albeit with limited movement as supporters kept focus on the Secure and Fair Enforcement Regulation (SAFER) Banking Act, which once again failed to cross the finish line).
Below, we recap some of the biggest developments of 2023, and what to expect in 2024.
Federal legalization efforts once again stalled, but there are signs of hope for 2024
While Congress once again failed to pass meaningful cannabis reform, there has been some incremental progress in 2023.
Most notably, in August of 2023, HHS recommended to the U.S. Drug Enforcement Agency (DEA) that cannabis be reclassified from Schedule I of the Controlled Substances Act (CSA) to Schedule III. While rescheduling would not legalize cannabis, moving cannabis to Schedule III would represent the biggest change in federal cannabis policy in the past 40 years, allowing it to be regulated (as opposed to prohibited) on the Federal level.
The most immediate benefit to the industry would be that Section 280E of the Internal Revenue Code, which currently prohibits most regular business deductions for Cannabis businesses, would no longer apply. Rescheduling would also open new avenues for research and medical uses, result in lighter criminal penalties for cannabis-related violations of the CSA, and would likely attract more investors, researchers, and entrepreneurs into the cannabis space.
In December, President Biden issued a proclamation, that further pardons people who have certain cannabis-related convictions under federal law and also granted clemency to 11 individuals who the President said are serving disproportionately long sentences for nonviolent drug offenses. The move expands on actions President Biden took in 2022 to pardon those convicted of simple marijuana possession under federal law, signaling the Administration's continued commitment to federal cannabis reform in 2024.
And while the SAFER Banking Act, which seeks to provide protections to financial institutions and various other professional service firms doing business with state-legal cannabis, once again failed to make it across the finish line in 2023, Senate Majority Leader Chuck Schumer (D-NY) has indicated that cannabis banking reform is among the Senate's top priorities in 2024.
And the SAFER Banking Act did not stand alone. 2023 saw over a dozen Cannabis bills filed, suggesting that bipartisan congressional support for some level of cannabis reform is on the rise. We anticipate that many of these bills will be re-introduced in 2024, including, specifically, the SAFER Banking Act, the Marijuana Opportunity, Reinvestment and Expungement (MORE) Act, which would federally legalize, tax and regulate marijuana, with provisions to expunge prior cannabis convictions, and the States Reform Act (SRA), which would also federally legalize marijuana, while taking steps to preserve existing state cannabis markets.
States continue to lead the way on legalization and reform despite facing challenges
Ohio, Minnesota, and Delaware each enacted laws in 2023 legalizing adult-use cannabis, bringing the total number of states (including Washington, D.C.) that have legalized recreational cannabis to 25. Kentucky also passed a law this past March legalizing medical cannabis in the Bluegrass state, becoming the 39th state to do so. According to a November 2023 report, by Carnevale Associates LLC, which provides consulting services related to cannabis reform and regulations, 53% of Americans now live in a state where recreational cannabis is legal — and nearly 75% live in a jurisdiction that has legalized medical or recreational cannabis.
Legalization and reform at the state level are likely to continue in 2024 given that public support for cannabis legalization reached an all-time high in 2023. According to a Gallup poll, conducted this past October, 70% of U.S. adults now favor legalizing cannabis — the highest level yet. Several states appear poised to pass medical or recreational cannabis legalization and reform laws in the coming year, including Hawaii, South Dakota, Florida, Nebraska, New Hampshire, and Pennsylvania.
But as we've noted in the past, legalization is just the first step. The roll-out of state-legal cannabis programs can be complicated and time consuming. New York is a prime example. It has been almost three years since New York legalized adult-use cannabis, yet — as of January 2024 — there are only 43 dispensaries, operating in the Empire State, according to the New York State Office of Cannabis Management.
Some of the delay can be attributed to legal challenges resulting in injunctions barring regulators from issuing dispensary licenses. This included challenges under the dormant commerce clause (DCC) of the U.S. Constitution, which prohibits states from discriminating against interstate commerce by favoring citizens of their states over others, as well as state constitutional challenges regarding the regulator's power to prioritize those with convictions over other applicants who qualify as "social equity" under the law (like women and veterans).See Variscite NY One, Inc. v. New York, No. 1:22-cv-01013 (N.D.N.Y. filed Sept. 26, 2022); Coalition for Access to Regulated & Safe Cannabis v. New York, No. 902390-23 (N.Y. Sup. Ct. Albany Cnty. filed Mar. 16, 2023); Fiore v. New York, No. No. 907282-23 (N.Y. Sup. Ct. Albany Cnty. filed Aug. 2, 2023).
Although most of these challenges were resolved via settlement, lifting the various injunctions and opening an application window that ran from Oct. 4 to Dec. 18, 2023, another challenge was filed by Variscite at the close of the window, with an application for an injunction being filed on January of 2024 seeking to preclude the regulator from processing applications based on similar challenges. See Variscite NY Four, LLC et al v. New York State Cannabis Control Board et al, 1:23-cv-01599 (N.D.N.Y. Dec. 18, 2023).
Similar challenges have been brought to other states' cannabis licensing regimes, including Maine and California. In August 2022, the 1st U.S. Circuit Court of Appeals affirmed that the DCC applies to the federally illegal cannabis industry and that a Maine law mandating local ownership of cannabis businesses is unconstitutional. 2024 could be the year that the 2nd and 9th Circuits weigh in on the issue (as the same Michigan-based applicant has initiated litigation currently pending in New York and California on this ground), setting up the prospect of a potential circuit split.
Industry growth remained sluggish in 2023 but there is hope for a turnaround in 2024
After enjoying a sales surge during the early stages of the pandemic, the U.S. cannabis industry continued to show signs of slowing down — particularly in mature markets, where legal growers and retailers are struggling with oversupply, low prices, and competition from the grey market.
M&A deals have also been on the decline since 2022, and while there was hope that this trend might be reversed in 2023, that hasn't proven to be the case. What little activity there has been is taking place primarily in emerging markets (particularly on the East Coast).
Although industry growth remained sluggish, there is hope for a turnaround in the years ahead. For example, rescheduling cannabis or the passage of cannabis reform legislation on the federal level would stimulate investor confidence in the industry, and in turn, incoming capital.
Moreover, a number of states, including California and New York, are taking steps to crack down on illicit cannabis sales, which may further improve the financial prospects of legal cannabis retailers struggling to compete with grey market operators (who are not burdened by the onerous taxation and regulatory requirements of legal retailers). Regulators are expected to continue to refine their approaches and test new strategies to clamp down on unregulated cannabis sales in their states and ease the competitive burden on legal cannabis retailers.
Originally published by Thomson Reuters.
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