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The potential rescheduling of cannabis from Schedule I to Schedule III represents one of the most anticipated regulatory changes in 2024. During a recent Qredible Live webinar, Mike Goral of Armanino LLP and Colin Campbell of Campfire Advisors shared insights about the complex realities behind this potential shift and what it means for cannabis businesses.
The ATB Cannabis Investor Survey reveals shifting sentiment around rescheduling, with investor confidence declining from 76% to 62%. At the heart of this change lies Section 280E of the tax code, which currently prevents cannabis companies from deducting ordinary business expenses, significantly impacting their cash flow and profitability. The IRS has made it clear that until rescheduling becomes official, they will continue to enforce 280E regulations, though some multi-state operators have begun filing returns without 280E calculations—a strategy Goral notes carries significant risk.
The potential removal of these tax restrictions has captured investor attention. According to the survey, 53.3% of investors believe the MSOS ETF (a fund tracking public cannabis companies) would rise above $20 per share post-rescheduling, representing an almost 200% increase from current levels. However, Colin Campbell cautions against assuming automatic value creation, emphasizing the importance of understanding a company's fundamental value beyond regulatory considerations.
Even with a favorable decision at the DEA's December 2nd hearing, Goral suggests the changes might not take effect until beyond January 2025 due to the time needed to develop new regulations. Meanwhile, many cannabis businesses continue struggling under substantial accrued tax liabilities and high-interest debt, though rescheduling could eventually make these companies more attractive to mainstream lenders and investors.
While the industry awaits potential rescheduling, forward-thinking cannabis businesses are already evolving their operational approaches. Many companies have begun positioning themselves with more traditional corporate structures, recruiting seasoned executives from the food and beverage industries and implementing professional management systems. This shift reflects a growing recognition that operational excellence matters regardless of regulatory status.
The complexity of these preparations extends beyond federal considerations. Even with federal rescheduling, Campbell notes that cannabis regulation might remain largely delegated to states, creating an ongoing need for state-by-state compliance strategies. This multi-layered regulatory environment requires businesses to maintain flexibility in their operational approaches.
The timing of cannabis rescheduling sits within a complex political landscape. As Campbell points out, with two significant wars occurring and government struggles to pass basic budgets, cannabis rescheduling competes for attention among major national priorities. This broader context helps explain why 38% of investors have become more bearish about rescheduling's timeline.
Rescheduling could fundamentally reshape how cannabis companies operate. Campbell highlights how the current requirement for vertical integration in many states creates "capital inefficiency," with companies building redundant infrastructure across state lines. Post-rescheduling, the industry might shift toward specialized operators focusing on specific supply chain segments - cultivation, manufacturing, or retail - rather than trying to excel at everything. This evolution could lead to more efficient operations and potentially stronger returns for investors who position themselves appropriately.
Success in this constantly changing regulatory environment requires a balanced approach. Companies must maintain strong operations under current regulations while positioning themselves for future opportunities. As Campbell emphasizes, businesses need to focus on building efficient operations that work today rather than betting everything on regulatory changes. Those who can maintain this balance while managing capital efficiency will be best positioned to benefit from rescheduling when it occurs.
