Introduction
In a move signaling a potential transformation of the American cannabis industry, the Drug Enforcement Administration (DEA) has proposed reclassifying cannabis from a Schedule 1 to a Schedule 3 controlled substance. This recommendation comes at the urging of the Biden administration, reflecting a significant federal shift towards a more lenient and scientifically grounded approach to cannabis regulation. For Colorado’s regulated marijuana operators and stakeholders nationwide, this change could herald a new era of long-awaited opportunities.
The reclassification of cannabis will reshape the landscape in numerous ways, from legal and financial frameworks to research and medical use. Already, Colorado’s elected leaders are expecting a flood of marijuana-related bills next legislative session. This article thoroughly explores these implications, ensuring Colorado’s cannabis operators are well-informed and prepared for the potential shifts ahead.
Legal Implications
The reclassification of cannabis from Schedule 1 to Schedule 3 under the Controlled Substances Act marks a fundamental shift in how federal law perceives and governs marijuana. Schedule 1 drugs, considered the most restrictive category, are defined as substances with “no currently accepted medical use and a high potential for abuse.” This category includes things like heroin and fentanyl, some of the worst drugs that plague our communities.
In contrast, Schedule 3 substances are acknowledged to have medical use and a lower potential for abuse compared to Schedule 1 and 2 drugs. You’ll find things in this category such as anabolic steroids, ketamine, and codeine. These are still highly regulated and “controlled” substances, but they are made available for medical uses and specific circumstances.
Legal Distinctions and Compliance Changes
Moving cannabis to Schedule 3 would reduce regulatory burdens significantly for Colorado’s cannabis businesses. Operators would likely face fewer legal hurdles in licensing, production, and distribution. The complete rulebook for Colorado Regulated Marijuana is over 500 pages, for example. Additionally, this reclassification could mitigate the severity of penalties for violations, aligning more closely with less stringently regulated substances. I’m not saying you’ll see “Tylenol with THC” on the shelves any time soon (or ever, please don’t sue me, J&J), but this is the first of a few crucial steps to make things like that a reality.
Impact on Federal and State Interaction
While federal law provides the framework, Colorado’s own cannabis regulations will need revisiting to align with new federal standards. This alignment process will be crucial for maintaining compliance and taking full advantage of reduced federal oversight. State regulators and cannabis businesses will need to navigate these changes collaboratively.
Adjusting State Regulations
Colorado, being a pioneer in cannabis legalization, will need to re-evaluate its regulatory frameworks to align with the new federal status of cannabis. As I write this, the Colorado Legislature has sent SB24-76 to the Governor’s desk. Titled “Streamlining Marijuana Regulation in Colorado,” the bill aims to bring Colorado’s now aging and comparatively strict regulations around cannabis more in line with other states that followed our example but did away with many of our now over-protective regulations.
During floor debates for this bill, the DEA’s review results about rescheduling were announced, and both legislators and regulators widely accepted that next year’s legislative sessions would face a tremendous number more bills that seek cuts and easing to regulations and prohibitions that go much further than this year’s bill. State regulators must engage with industry stakeholders to streamline these changes effectively and actively.
Business Implications
The shift of cannabis to a Schedule 3 substance promises not just legal and regulatory ease but significant business advantages as well. Colorado’s cannabis operators could see enhancements in several key business areas, potentially leading to expanded growth and profitability. Colorado has been hit particularly hard by the overall slump in the cannabis market lately, and I know many operators to whom this will be very welcome news.
Access to Banking and Financial Services
One of the most pivotal changes could be in banking and financial services. Historically, cannabis businesses have operated predominantly in cash due to federal banking regulations that discourage financial institutions from servicing Schedule 1 substance-related businesses. With cannabis moving to Schedule 3, banks may be more willing to provide services, reducing the operational risks and inefficiencies associated with large cash transactions.
Security is a constant concern and expense for all operators in Colorado, and we may begin to see changes in legislation that reflect the decreased risk regulated storefronts especially will face. Less cash means less likelihood of burglary and less risk of crime on the property in general.
Tax Implications and Financial Relief
Currently, cannabis businesses are heavily burdened by IRS Section 280E, which prohibits businesses dealing with Schedule 1 substances from deducting typical business expenses. Reclassification to Schedule 3 would allow these businesses to claim deductions, significantly lowering their tax burdens and improving overall financial health.
The benefits here really cannot be overstated enough. It will also go a long way in easing the general discontent amongst the industry that while the IRS was happy to take operators’ taxes, it wouldn’t allow them the same essential relief any other business is granted. The Colorado legislature has already passed a new law this year allowing operators to take those exceptions at the state level starting in 2025.
Prospects for Interstate Commerce
The move to Schedule 3 could also pave the way for discussions on interstate cannabis commerce. Currently, the interstate transport and sale of cannabis are prohibited under federal law, even between states where cannabis is legal. A reclassification could loosen these restrictions, leading to a more unified national market. The opening of genuine interstate cannabis-related commerce would allow Colorado cannabis businesses to expand their markets beyond state lines, potentially transforming them into national players in the cannabis industry.
Broader interstate commerce may also lead to a more focused branding and reach effort by Colorado cannabis growers and manufacturers. Imagine seeing Olio products on shelves in Florida, Maine, or California stores with slogans like “Colorado Proud” or “First in Cannabis, Foremost in Quality.” There will be other competitors, but Colorado-regulated marijuana companies have a considerable head start in the pursuit of being “The Marlboro of Marijuana.”
Medical and Research Opportunities
Cannabis at Schedule 3 not only opens up the financial pressure release valve but also significantly enhances the prospects for medical and research advancements. This is personally, my greatest anticipation. For so long, the cannabis industry and its precursors have been harangued as dangerous beyond value and then not allowed to do product research to prove otherwise.
For decades now, opponents of cannabis legalization and proliferation have pointed to the lack of information to prevent changes in legislation. As laws began to change despite those efforts, the argument changed to focus on the lack of concrete proof that no serious harm was evident. I don’t think anyone is trying to claim marijuana for any purpose is harmless, but many of us want to have meaningful data as much as any detractor.
Research Freedom
Currently, stringent regulations severely restrict cannabis research, with its Schedule 1 classification creating numerous hurdles for scientific studies. As a Schedule 3 drug, cannabis would be subject to fewer regulatory constraints, especially in states where medical or recreational use has already been adopted. Better data could lead to a deeper understanding of its medicinal properties, potential health benefits, and side effects. Universities and private institutions would likely find it easier to initiate studies, leading to innovations in cannabis-based medical treatments.
Expansion of Medical Use
Reclassification could also lead to broader acceptance and integration of cannabis into traditional medical practices. With less federal restriction, medical professionals might be more inclined to prescribe cannabis-based treatments, which could expand its use in managing and treating a variety of conditions. Greater federal acceptance would not only increase patient access to cannabis therapies but also legitimize its medical use among healthcare providers.
Marketing and Advertising
The reclassification of cannabis to Schedule 3 is poised to change the marketing landscape for cannabis businesses in Colorado dramatically. This adjustment could lead to more expansive and effective marketing strategies that align with the reduced regulatory scrutiny.
New Marketing Opportunities
With the stigma associated with higher-schedule narcotics reduced, cannabis companies may find more opportunities in mainstream advertising channels that were previously restricted. Mediums currently inaccessible including digital advertising platforms like Google Ads, social media platforms, and possibly even traditional media outlets like television and radio, where advertising cannabis products has traditionally been prohibited or heavily restricted even where locally allowed.
Targeting New Demographics
The change in classification could also shift public perception, making cannabis products more palatable to a broader audience. Less public stigma around marijuana use opens the door for marketing campaigns aimed at demographics that were previously hesitant. Marketing strategies could now focus on highlighting the therapeutic and wellness aspects of cannabis to attract new users looking for legitimate health benefits. Until recently in Colorado, for example, regulated manufacturers and stores were prohibited from advertising products themselves and can only discuss or display Branding and consumer confidence-related adverts.
Shift in Public Opinion
Reclassification might also impact public opinion, potentially increasing support for cannabis legalization even amongst those who are otherwise not interested in its use. As cannabis moves away from being seen as a hazardous drug to a regulated medicinal substance, more individuals might support its full legalization, seeing it as beneficial or at least harmless under regulated conditions.
Conclusion
The DEA’s proposal to reclassify cannabis as a Schedule 3 substance represents a monumental shift that could reshape many facets of the industry—from legal frameworks and business operations to marketing strategies and national legalization movements. For stakeholders in Colorado and across the country, it’s an opportunity to advance their interests and influence the direction of the industry in this new era.
Stay informed and engaged as these changes unfold. For cannabis businesses, adapting to these shifts will be crucial for maximizing new opportunities. Subscribe to our newsletter for updates, or contact our firm for expert guidance on navigating these evolving landscapes.
