I’ve written before about the bipolar nature of cannabis investing and its tendency to swing from optimistic highs to frustrated lows.
Right now, we’re in a low period, with cannabis stocks unloved yet again despite meaningful signs of cultural acceptance and legislative change.
While there are no guarantees, it’s likely that cannabis stocks will swing higher again before the end of the year, powered by a major federal catalyst, namely, rescheduling.
The Drug Enforcement Administration (DEA) and its parent the Department of Justice (DOJ) have filed a proposed rule that would move cannabis to Schedule III from Schedule I under the Controlled Substances Act (CSA).
It’s more than a simple administrative change. Rescheduling would be a huge cash windfall for cannabis companies because it would permit them to deduct operating expenses against revenue.
That’s currently prohibited by the IRS rule 280E, but should cannabis be rescheduled, the largest companies would see cash infusions of $50 million to $100 million.
Predicting when, or even if, this will happen is tricky. So I’ve pieced together my best guesses on timing below, based on my own thinking and input from Shane Pennington and Boris Jordan, two well-connected cannabis insiders.
Pennington is one of the leading experts on federal cannabis regulatory law. He is a partner at Porter, Wright, Morris, and Arthur. Jordan is the chairman of Curaleaf (CURLF), one of the heavyweights in Washington, D.C. cannabis lobbying.
Here are the highlights of the next steps along the way in rescheduling, and the odds of a potential pitfall derailing progress.
The Timeline
* Following the proposed rule, the next step in this process is the close of public comments on July 22. This event won’t be much of a catalyst.
* The significant step after that will simply be publication of the final rule. To get this done, the DOJ and DEA have to respond to substantial comments from the public. The most complicated and nuanced comments from both opponents and supporters will come during the last day or two of the comment period. They want to drop their comments at the last minute to limit the amount of time adversaries have to respond. In other words, once comments close on July 22, the DEA and DOJ will still have a lot of work to do.
This suggests final rule publication could take a long time.
However, that might not be the case. There’s a major political angle here in that President Joe Biden wants to use cannabis reform to attract voters, especially following the debate debacle. This means publication of a final rule could well happen before the election. Jordan, at Curaleaf, says publication of a final rule by October is “very possible.” This would be a huge catalyst for cannabis stocks, especially considering how negative sentiment is at the moment.
A Potential Risk
* Along the way, the whole rescheduling timeline could get thrown into turmoil if the DEA and DOJ decide to hold an internal administrative law judge hearing on the matter. This could easily add years to the process. A tricky angle here is that there’s no deadline for the agencies to tell us whether they want to hold hearings or not. “If there is a final rule, then you know there will be no hearing,” says Pennington.
Both Jordan and Pennington downplay the odds of a hearing. Pennington points out that hearings are generally the exception, not the rule. Next, in recommending rescheduling to the DEA, he says, the Department of Health and Human Services did a thorough job in presenting supporting science and sound legal logic under rescheduling guidelines set up by the CSA and various court interpretations of those rules. “The amount of process this has been through is extraordinary,” he says. “This has been extremely well vetted.”
Then there is the political angle, again. “They will not have an administrative law judge hearing if the goal of the administration is to get this done before the election,” says Jordan. “There is a political angle to this, not just a science angle.”
To learn more about other potential rescheduling pitfalls, other catalysts, and the best cannabis names to own, consider subscribing to Cabot Cannabis Investor.
