How U.S. marijuana reclassification could help cannabis companies

Cannabis clones are displayed for customers at Home Grown Apothecary in Portland, Ore. (AP Photo/Jenny Kane) (Jenny Kane/AP)

U.S. President Donald Trump’s administration is looking to reclassify marijuana as a less dangerous drug, a shift that could ease criminal penalties and reshape the pot industry by lowering tax burdens and making it easier for firms to secure funding.

Trump said on Monday a decision could come within the next couple of weeks.

U.S.-listed cannabis-linked stocks rose in pre-market trading on Tuesday, led by a 13 per cent jump in Canopy Growth. Organigram Global, SNDL, Aurora Cannabis and Tilray Brands gained between three and 12 per cent.

What does reclassifying entail?

Under the Controlled Substances Act, marijuana is listed as a Schedule I substance, meaning it has a high potential for abuse and no current accepted medical use.

Reclassifying marijuana as a less dangerous drug could unlock banking access for pot producers, attract institutional investors, reduce tax burden and spur mergers and acquisitions.

Securing funding remains one of the biggest challenges for cannabis producers, as federal restrictions keep most banks and institutional investors out of the sector, forcing pot producers to turn to costly loans or alternative lenders.

Last year, the Biden administration asked the Department of Health and Human Services to review marijuana’s classification, and the agency recommended moving it to Schedule III, a category for substances with a moderate to low risk of physical or psychological dependence.

What would be the tax implications?

One of the biggest benefits from a reclassification would be that cannabis firms would no longer be subject to Section 280E of the U.S. federal tax code.

That provision prevents businesses dealing in Schedule I and II controlled substances from claiming tax credits and deductions for business expenses.

What comes next?

TD Cowen analyst Jaret Seiberg said full legalization remains unlikely, citing a lack of meaningful support in Congress and limits on how far the Drug Enforcement Administration (DEA) can go through rescheduling alone.

“It seems more likely to us that Trump would revive the effort at the DEA to move cannabis to Schedule III, which would permit the government to regulate it,” said Seiberg.

Some analysts, however, say a reclassification will not change much.

Cannabis will remain federally illegal, interstate trade will not be allowed and the silo system of each state deciding their own market rules will still apply, according to equity research firm Zuanic & Associates.

(Reporting by Mrinalika Roy and Arunima Kumar in Bengaluru; Editing by Saumyadeb Chakrabarty)