Department of Justice Proposes Rescheduling Marijuana (Cannabis) to Schedule III

On May 21, 2024, the United States Department of Justice (DOJ) published the long-awaited Notice of Proposed Rulemaking (NPRM) to reschedule marijuana (cannabis) from a Schedule I to a Schedule III controlled substance, a first step toward easing federal restrictions on cannabis and potentially opening the door to further cannabis research and development. This regulatory change could have far-reaching consequences for the cannabis, pharmaceutical, and banking industries if announced in a final rule. Stakeholders interested in submitting comments to the Department of Justice must do so by July 22, 2024.

DEEP

Legal basis

Following a comprehensive cannabis safety assessment by the U.S. Department of Health and Human Services (HHS) and a subsequent recommendation from the Drug Enforcement Administration (DEA), the Department of Justice published an NPRM on the Rescheduling of Cannabis. Cannabis is currently classified as a Schedule I drug, reserved for substances such as heroin and peyote that are considered highly addictive and have no medical value. The DEA’s decision to reschedule marijuana as a Schedule III drug, indicating a moderate or low risk of addiction, will not legalize marijuana, but it will represent a significant step toward reducing federal restrictions and recognizing the therapeutic and medical potential of cannabis.

The Controlled Substances Act (CSA) divides controlled substances into five levels of control, or “schedules,” based on the drug’s potential for abuse, whether the drug has a currently accepted medical use, and whether there is an accepted safety for use of the drug under medical supervision or level of mental or physical dependence that may result from drug abuse.

Under the CSA, in determining whether a drug should be controlled (and, if so, on what schedule), the Secretary of HHS and the Attorney General must consider eight factors set forth in 21 U.S.C., section 811, subsection (c). The eight factors are:

The actual or relative abuse potential of the drug
Scientific evidence supporting its pharmacological effects, if known
The state of current scientific knowledge about a drug or other substance
Its history and current pattern of abuse
Scope, duration and significance of harassment
What, if any, public health risk exists
Risk of psychological or physiological addiction
Whether the substance is a direct precursor of an already controlled substance

The NPRM discusses in detail the assessment conducted by HHS with respect to each of these factors, ultimately concluding that marijuana has a lower potential for abuse than narcotics or other Schedule I (such as heroin and peyote) or II (such as fentanyl and hydrocodone) substances. that marijuana has been approved for medical purposes in treatment and that misuse of marijuana can lead to moderate or low physical dependence or high psychological dependence. The NPRM seeks comments and feedback from cannabis stakeholders regarding the Department of Justice’s assessment of the eight factors listed above.

It is worth noting that the marijuana rescheduling proposal applies to substances that meet the statutory definition of “marijuana”, limited to Cannabis sativa L. plant (other than mature stems and seeds) and plant derivatives, including marijuana extracts and any parts of the plant with a delta-9-tetrahydrocannabinol (THC) concentration of not more than 0.3% on a dry weight basis (definition of “hemp” ). The proposal does not apply to synthetic THC, which does not fall within the CSA’s definition of marijuana. Synthetically derived THC will remain in Schedule I. Additionally, interested parties should be aware that the production, distribution, dispensation and possession of marijuana will continue to be subject to existing criminal prohibitions under the CSA.

Consequences of rescheduling marijuana

If finalized, the proposed rescheduling of marijuana from Schedule I to Schedule III could have far-reaching consequences for the cannabis, pharmaceutical and banking industries. The changing regulatory landscape creates opportunities and challenges for companies operating in the cannabis industry. As federal policy moves toward a more permissive approach, businesses must remain vigilant and proactive in navigating the changing regulatory environment while assessing potential new opportunities provided by the federal government’s new stance.

Rescheduling marijuana from Schedule I to Schedule III would subject marijuana to the same regulatory controls that apply to Schedule III substances. Marijuana would still be subject to existing regulations under the Federal Food, Drug, and Cosmetic Act (FDCA), under the jurisdiction of the Food and Drug Administration (FDA). In the NPRM, the Department of Justice notes that a drug containing a substance within the CSA’s definition of marijuana would require FDA approval to be legally “introduced or furnished for introduction into interstate commerce,” unless the new investigational drug (IND) ) is valid for this drug. Marijuana’s classification as a Schedule I controlled substance stops those seeking federal funding for research that could determine that cannabis is a Generally Recognized as a Safe Ingredient (GRAS) by the FDA. As noted in the NPRM, FDA would require approval of any medicinal products containing marijuana, ensuring that they meet safety and effectiveness standards before being introduced into interstate commerce. Rescheduling marijuana to Schedule III would allow for more extensive clinical trials, and pharmaceutical companies could submit INDs and new drug applications (NDAs) for marijuana-based products to demonstrate their safety, effectiveness and manufacturing quality. Additionally, this change may facilitate access to certain funds and grants previously unavailable to entities interested in marijuana research and development opportunities.

In addition to the processes that would apply to marijuana-based products as part of the drug development and approval process, the regulatory processes that apply once a drug is approved will also apply to marijuana-based products. For example, the DEA requires registration to allow companies and/or individuals to manufacture, import, export, distribute, and dispense controlled substances. Businesses entering the cannabis industry should be aware that DEA registration requirements may remain in effect once the proposed language is finalized.

Financial consequences for businesses

Rescheduling cannabis sales could ease some of the financial burdens on cannabis companies. Currently, those operating a cannabis business face a prohibitive tax burden under Internal Revenue Code Section 280E, which disallows certain business deductions for businesses that engage in Schedule I or II drug trafficking. As a result, these businesses often face higher income tax rates and often face higher costs and less favorable terms on loans and insurance due to the risks associated with Schedule I substances. Removing cannabis from Schedule I could significantly reduce these financial and operational challenges facing against cannabis companies.

Rescheduling marijuana from Schedule I to Schedule III could impact the banking industry, primarily by reducing the regulatory and legal risks associated with providing financial services to marijuana-related businesses (MRBs). As a Schedule I drug, marijuana is classified as a substance with no accepted medical use and a high potential for abuse, making it illegal under federal law. This creates significant legal risks for banks providing services to MRBs, as banks may be accused of money laundering or aiding and abetting criminal activity. By moving marijuana to Schedule III, which would bring it in line with other highly regulated drugs, the risk of such charges could be minimized. The proposed changes could help cannabis stakeholders access loans and move away from cash-only businesses. Moreover, moving marijuana to Schedule III would likely prompt federal regulatory agencies such as the Financial Crimes Enforcement Network (FinCEN) to issue updated banking guidance for MRBs. Updated FinCEN guidance would provide banks with a clearer framework for legal compliance and risk management.

Importantly, following this news, banks may still find it risky to open the door to MRBs, given the statutory and regulatory ambiguity regarding the effects of reclassification. In particular, other laws, such as the Safe and Fair Enforcement Banking Act (SAFER Act), provide clearer protections in the statute if codified, and banks may consider waiting to implement operational changes until further safeguards are in place.

Words of caution

Cannabis stakeholders should note that rescheduling marijuana sales does not decriminalize marijuana or legalize its recreational use and that the same criminal prohibitions on the production, distribution, dispensation and possession of marijuana similar to restrictions applicable to controlled substances would apply Schedule III with similar localization such as ketamine and anabolic steroids.

Additionally, the federal rescheduling of marijuana sales does not directly impact the state of state cannabis laws, including adult use, medical use, or state low-THC cannabis systems. Interested parties should consult legal counsel to assess what impact, if any, rescheduling marijuana sales will have on their state’s specific cannabis laws.

NEXT STEPS

The NPRM comment period ends on July 22, 2024. Interested parties interested in commenting on the proposed rules must submit comments electronically or by mail by July 22, 2022.

As federal cannabis regulations undergo significant changes, stakeholders must remain informed and engaged in the rulemaking process, and businesses must continue to adapt to the changing landscape to remain competitive and compliant.

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