Capital Market Impacts and Timeline of Cannabis Schedule III Move

Cannabis Benchmarks spoke with Matt Karnes, founder of GreenWave Advisors, for his perspective on the recent DEA approval to reclassify cannabis as a Schedule III controlled substance.

Key Points

• As expected, the DEA has approved the reclassification of Cannabis from Schedule 1 to Schedule 3 eliminating a key element of risk and uncertainty that has kept many institutional investors on the sidelines.  GreenWave Advisors view this move as a prelude to eventual de-scheduling. 
• Importantly, with a Schedule III listing, the 280E tax burden is eliminated which immediately accelerates the free cash flow profiles of plant touching businesses. Many operators in effect, have historically had to raise capital to pay taxes.
• Legalization at the Federal level could take years. In the meantime, Schedule III designation will expand permissions for research, likely fostering the bringing to market of new cannabinoid-based products, presumably under the umbrella of FDA oversight.
• Safe Harbor provisions for banks and SEC regulated activities (investment banking, custody, stock exchanges etc.) remain in question. With a re-scheduling, updated FinCen (U.S. Treasury Department) that includes such protections may suffice in the absence of specific legislation (such as SAFER Banking).

Timeline: Coincidence or Pre-determined?

As indicated in 2014 as part of GreenWave Advisors investment thesis, “The legal marijuana industry is emerging in the United States (and globally) at a steady, deliberate pace. Although uncertainty persists as to the nature, extent, and timing of universal legalization, GreenWave Advisors believe that change is coming and that investment opportunities in the burgeoning marijuana industry are and will be substantial.”The likely effective date for implementation (likely the end of August), which coincides with the November election.

8/30/2023 – HHS makes a reconmmendation to DEA

4/30/2024 – DEA approval

5/1/2024 – The Office of Management and Budget begins a review of the proposed rule. Once the OMB review is complete, a proposed ruling will be filed in the Federal Register.  This is followed by a 60-day comment period, during which the opposition can seek a hearing before an Administrative Law Judge (ALJ).  After an ALJ review, the DEA makes its final ruling, which is again filed in the Federal Register. Schedule III becomes effective 30 days after that. Again, the opposition can appeal the decision and seek judicial review (which is expected). Accordingly, the process could drag on, or in the best-case scenario, the effective date could come 90 days after the DEA proposed rule if filed in the Federal Register (around the end of August).

Capital Markets Reform

The industry has hit an inflection point but active and unrestricted capital markets access is needed to maximize the potential economic (and social) benefits. U.S. cannabis companies remain disadvantaged relative to their Canadian counterparts that are able to list on major U.S. exchanges in light of the fact that:

• More states have legalized cannabis without prosecution.
• A few of the U.S. cannabis operators have moved to the TSX and more could follow. With the TSX listing, some banks have lifted a longstanding ban on custodial services making it easier for institutions to trade these stocks.
• A listing on a major exchange provides more liquidity and would be a first step towards institutional ownership.
• Up-listing will spur more M&A activity (economic benefits).
• Furthermore, American based tobacco, alcohol and pharma concerns remain unable to deploy capital into the U.S. Cannabis (or risk de-listing) thus sector investment is restricted to outside U.S. borders.