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How Does Cannabis Reclassification To Schedule III Differ From De-Scheduling & What Is Ideal Reform?

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Over the past several years, the US cannabis industry has experienced many important milestones. Among the important ones are the 24 states to date have legalized adult-use cannabis and some 40 states that have launched medical marijuana programs, President Biden’s pardon of some 6,500 federal cannabis prisoners and call on governors to do the same for state prisoners. The most recent breakthrough happened this August when the Health and Human Services recommended Drug Enforcement Administration (DEA) reclassify marijuana to a Schedule III Substance.

Cannabis is currently categorized as a Schedule 1 Substance, meaning it has no accepted medical value and has high abuse potential. Other substances that fall under this category include heroin, LSD, ecstasy, etc.

To learn more about what reclassification and other possible reforms such as the SAFER Act would mean for the industry Benzinga reached out to a legal expert, Michael Rosenblum. Partner at Thompson Coburn LLP and co-chair of the company’s cannabis group, Rosenblum previously served as general counsel at well-known marijuana company Stiizy. Since 2017, he represented cannabis clients building his acumen on mergers and acquisitions, real estate, and regulatory matters.

“Reclassifying cannabis to Schedule III means that the federal government no longer views cannabis as being among the riskiest drugs,” Rosenblum told Benzinga. Although cannabis would remain a controlled substance, rescheduling would reduce the obstacles faced by businesses and consumers.” The most important benefit for weed businesses would be tax relief regarding the issue of the IRS code 280E, which prohibits the marijuana industry from taking federal deductions.

What About De-scheduling?

“If cannabis were to be de-scheduled, it would no longer be listed as a controlled substance on any of the CSA schedules (such as alcohol or tobacco),” Rosenblum said. “It would still be subject to rules, but would have fewer restrictions than controlled substances under the CSA.”

Taking HHS's recommendations into account Rosenblum believes that de-scheduling is very unlikely, while rescheduling to Schedule III is likely to “occur before the 2024 presidential election, and may happen much sooner.”

An Ideal Federal Cannabis Reform

According to Rosenblum, an ideal cannabis reform would include legalization regulation, taxation and criminal justice aspects that would consist of the following:

  1. Remove (and expressly exclude) cannabis from the Controlled Substances Act;

  2. Preserve states’ authority to regulate cannabis;

  3. Allowing cannabis to be transported across state lines (including through a state in which cannabis remains illegal to a jurisdiction in which cannabis is lawful);

  4. Expunge past nonviolent cannabis convictions and dismiss pending charges and convictions awaiting sentencing;

  5. Impose a low federal excise tax (on recreational sales only) and use the proceeds to fund loans to small cannabis businesses and enforcement efforts against unlicensed operators.

What About the SAFER Banking Act?

This year in cannabis was marked by yet another milestone that could ultimately improve banking access for marijuana businesses through the SAFER Banking Act. An earlier version of the bill, passed the House seven times but failed in Senate both under Democratic and Republican control.

According to Rosenblum, the SAFER act is “particularly beneficial for small and midsize operators, as the MSOs and larger companies already have access to banking services.” He added that even though there are many workarounds to address restrictions on credit card and debit card payments, such as cashless ATMs, they are generally still not compliant and create risks and additional costs for operators.

“While the SAFER Banking Act will be valuable for certain purposes, its impact will be somewhat limited given that it does not legalize cannabis federally, “Rosenblum said. “For example, it may not be much help for retailers facing ongoing challenges with payment methods. Even if the SAFER Banking Act passes, it is unclear whether major credit card companies will permit their networks to be used for processing cannabis transactions, given their policy of prohibiting illegal goods and services.”

What’s also very important, he says it that SAFER doesn’t resolve some of the biggest industry challenges such as access to capital. “Institutional lenders may view the Act as another step in the right direction, but may still not be comfortable deploying capital in the space until cannabis is federally legalized.”

Furthermore, the potential listing eligibility of U.S. cannabis companies on NASDAQ and the New York Stock Exchange will remain uncertain even if the SAFER Act becomes law, Rosenblum points out.

The cannabis legal expert believes that there’s a chance of SAFER passing despite many hurdles including disputes regarding amendments to the text of the bill.

“Certain advocates may perceive the bill as marginally diminished in significance, with the cannabis re-scheduling now an imminent possibility,” Rosenblum concluded.


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