On September 12th, the NFL’s first Monday Night Football game of the season kicked off. It featured QBs Russell Wilson of the Broncos versus Geno Smith of the Seahawks. The blue-chip Wilson – a Super Bowl champion and nine-time all-star with a $165M guaranteed contract (and a bizarre Subway sandwich promotion called “The Dangerwich”) – got surprisingly outplayed by the journeyman Smith – whose most famous NFL moment to-date was getting punched in the face by his own teammate. During an interview after the game, Smith summed up his underdog career saying: “they wrote me off. I ain’t write back though!”
Outside of our enthusiasm for sarcastic barbs, this quip also struck us as a rallying cry for the cannabis industry. Since our last missive, cannabis industry sentiment has only gotten worse. For example, the AdvisorShares Pure U.S. Cannabis ETF (a blended portfolio of U.S. cannabis stocks) declined by 25%, or a cumulative drop of over 80% since its 2021 high mark. This performance has even the optimists ready to write the industry off.
On October 6th, however, President Biden unexpectedly jumped into the fray, announcing a multi-step reform push. In addition to criminal justice initiatives, he stated: “I am asking the Secretary of Health and Human Services and the Attorney General to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law. Federal law currently classifies marijuana in Schedule I of the Controlled Substances Act (CSA), the classification meant for the most dangerous substances. This is the same schedule as for heroin and LSD, and even higher than the classification of fentanyl and methamphetamine – the drugs that are driving our overdose epidemic.” Put simply, cannabis’s classification on Schedule I is the biggest shackle on the industry’s progress. While states have legalized cannabis, it remains Federally illegal, relegated to the most restricted tier of the Federal system – which, among other things, prohibits access to banking, distorts taxation, and blocks interstate commerce.
So, what does Biden’s statement mean? First off, let’s clarify an oft-confused topic. De-scheduling means a complete removal from CSA’s sphere of influence, while re-scheduling means shifting between tiers towards more/less restrictions. The CSA has five tiers (or schedules), from LSD on Schedule I to codeine cough medicine on Schedule V. Obviously, the ideal outcome for cannabis is de-scheduling, such that it can be regulated like alcohol and tobacco. However, re-scheduling could be helpful by eliminating certain barriers like IRS 280e. Second, industry observers believe Biden’s statement is more likely to result in re-scheduling, if anything, since it asks for an administrative review of the Schedule I status specifically. While possible to de-schedule via such an administrative review, the process is complex, time-consuming, and involves agreement from multiple Federal agencies debating thorny topics like potential for abuse or addiction and medical benefits. Additionally, merely kicking off a review does not guarantee any changes, especially given the DEA’s stubbornness towards cannabis in the past. Third, even if the agencies decide to re-schedule, then the question becomes where cannabis lands. Moving to Schedule II, for example, might not be much of an improvement.
There may, however, be an additional, and perhaps more powerful, impact from Biden’s statement. While administrative reform may be challenging, cannabis can be directly de-scheduled via Congress passing a new law to replace or amend the CSA. There have been, in fact, competing bills introduced to do just that (the MORE and CAOA Acts, specifically), but the outlook for passage has been highly uncertain. Additionally, the SAFE Act (a separate bill focused on fixing the banking issue) is also in the legislative mix. Though not an explicit call for Congressional action, could Biden’s reform push, when combined with the upcoming mid-terms and overwhelming public sentiment, provide the much-needed catalyst for legislative action? Stock market investors were optimistic – bidding up the cannabis ETF approximately 35% on the day of Biden’s announcement.
Unlike our dominance in Fantasy Football, we are no experts when it comes to handicapping government policy. Interestingly for cannabis, though, this small breath of optimism from Biden is the second consecutive positive development – the first being the cultivation tax reform in California discussed previously. While these steps don’t amount to the full measures needed to fix the industry, we are happy to see the incremental progress and hope it’s a sign of more good things to come. So much like our journeyman hero Geno Smith, you can write off cannabis if you want, but we aren’t writing back…
Thanks for tuning in, and until our next update, please stay safe and healthy.
Mike, Kip, and Austin
Co-Managers, Presidio View Capital