Gearing up for legal cannabis

Tobacco Journal International May 2024

Dried cannabis on gavel standT
he legal recreational use of cannabis
for smoking, eating and drinking has
skyrocketed in the United States in
the more than 10 years since the
state of Colorado became the first
US jurisdiction to legalise the plant for adult
recreational consumers in January 2014.1
As of 29 February 2024, some 38 states
have legalised the use of marijuana for
medicinal purposes and 24 of these (plus
the federal District of Columbia) also allow
recreational consumption. More states are
expected to follow suit this year, with liberalisation proposals under consideration in
Florida, Hawaii, South Dakota and New
As a result, analysts from Germany-based
statistical analysis service Statista said annual American sales of legal, regulated cannabis products have already exceeded USD
30 billion.3


Meanwhile, given the size of the
ongoing illegal market in all US states, Matthew Karnes, founder of New York Citybased cannabis-centric advisory firm
GreenWave Advisors predicts the total US
marijuana business could reach USD 100
billion in annual sales upon full legalisation,
a process that could take 10 years. With
legalisation in the US happening step by
step, this “bifurcated (legal/illegal)” market
is already merging into a regulated system,
and vice versa, he said.
In fact, the process has been accelerating
more quickly than would perhaps have been
expected. The experience of New York state
(population 19.8 million) is telling. Since
the state in late 2021 became the 15th to
allow recreational marijuana, regulatory officials have been slow to license outlets.
While the city of New York currently counts
ten officially sanctioned dispensaries, the
total of openly operating unlicensed cannabis shops is closer to 8,000, according to
New York City Council. “Nobody really
knows how big the illegal market is,” said
Aaron Smith, co-founder and CEO of the
National Cannabis Industry Association
(NCIA). “It’s kind of an interesting case because its not actually legal but tolerated,” he
said referring to the sale of cannabis.
This rapidly expanding market notwithstanding, the American cannabis industry
still faces formidable hurdles preventing it
from reaching its potential. Despite state
and local liberalisation during the past several years, cannabis is still illegal on the federal level, where its Drug Enforcement Administration (DEA) categorisation as a
Schedule I drug (along with heroin) not only
prohibits research into its use but also prevents the flow of capital and banking services. Many cannabis operations that are
legal locally are effectively prohibited from
issuing stocks and bonds in the US and
maintaining business bank accounts, increasing cash security concerns.
The federal tax implications are even more
severe. Under provision 280E of the Internal Revenue Service (IRS) code, any business selling Schedule I drugs is prohibited
from taking ordinary income deductions


Could legal cannabis go down the same route as the beer market – dominated by a few players but with room for craft brands?

like employee compensation and materials,
resulting in an effective federal tax rate that
is “three times as high,” said the NCIA’s
Smith. A legislative attempt – a SAFER
Banking Act proposed last April (2023) – to
tackle the banking problems associated with
marijuana prohibition has so far advanced
no further than the Senate Banking Committee.
More encouraging to industry advocates is
the hoped-for reclassification of cannabis to
a Schedule III drug via regulatory action. In
2022, the Biden Administration directed
the Department of Health and Human Services to consider rescheduling. In August
(2023) the department completed its study
and suggested re-scheduling. It was not
until earlier this year that a 254-page report
(un-redacted) was made publicly available.
Unsurprisingly to most, the recommendation affirms that cannabis meets the
criteria for Schedule III classification (has
medicinal use and is not deemed as harmful
as Schedule I or II).4
The federal department subsequently recommended a switch to Schedule III in January (2024), with the DEA expected to soon
implement this recommendation.
Karnes said 2024 being an election year
made DEA re-scheduling timing uncertain but should this happen: “Inevitable
reclassification will eliminate the 280E
tax burden which materially improves
cash flows and unlocks shareholder value
in short order,” he said. “Rescheduling
also eliminates a key element of risk and
uncertainty that has kept many institutional investors on the sidelines.” It
should allow US cannabis businesses to
open bank accounts and freely trade
product and inputs between states where
cannabis is legal.5
Even with re-scheduling, ‘safe harbour’
provisions that protect banks from liability
regarding the filing of suspicious transaction
reports to US financial intelligence unit
FinCEN, along with Securities & Exchange
Commission (SEC) regulated activities (such
as investment banking and stock exchanges)
“remain in question”, said Karnes. That said,
should re-scheduling be followed by updated
guidance from FinCEN, offering legal protection when banks deal with legal cannabis
businesses, that “may suffice in the absence
of specific legislation (such as SAFER Banking)”, he added, commenting: “It’s really unfair that the capital is going to Canada
[which legalised in 2018] and not the US.”
Nevertheless, the industry is expecting progress on the federal regulatory front to come
soon. “Most indications are that they likely
will reschedule this year, and there are already
indications that lots of banks are becoming
more willing to do business,” said Smith.
Big companies running legal businesses in
different sectors are also showing some willingness to dip their toes into the cannabis
sector. Prominent among these are tobacco
companies looking to diversify from a product line burdened by health concerns.
In the tobacco sector, Virginia-based giant
Altria has been profiting from medical cannabis products since it spent USD 1.8 billion on a 41 per cent stake in Canada’s Cronos Group, a major medical marijuana in 2019. “We support a comprehensive federal framework for all cannabis
products that is based on science and evidence, and we believe it is time for a
national dialogue about that regulatory
framework,” Altria said in a February (2024)
statement. To foster this dialogue, the tobacco company is participating in a Coalition for Cannabis Policy, Education, and
Regulation (CPEAR), which has released
policy-focused papers on small business
and mental health; convened a Center of Excellence comprised of policy experts to address critical policy questions facing lawmakers debating cannabis regulation; and
established a Congressional engagement
programme, making CPEAR a resource to
policymakers engaged in federal cannabis
reform. Similarly, British American Tobacco
(BAT) announced in 2021 that it was buying
20 per cent of another Canadian cannabis
company, OrganiGram Holdings, for GBP
126 million (USD 162 million).
Capital is also flowing in the other direction, with cannabis companies investing in
old school enterprises. Tilray, a Canadian
purveyor of cannabis and beer, announced
in 2023 it was paying Anheuser-Busch’s
InBev division USD 85 million to acquire
eight leading beer brands. The purchase will
triple Tilray’s beer business, making it the
fifth-largest craft brewer in the US.
Interestingly, the NCIA’s Smith thinks the
Tilray-AB deal reflects how market concentration may come to the cannabis sector
once full legality comes to America: “I expect things will probably wind up like the
beer market – dominated by a few players
but still with room for craft brands.”
Ed Zwirn, in New York