The future of cannabis after debt restructuring

The cannabis world is undergoing another major shift with the possibility of rescheduling – but what does that really mean?”

The Fresh Toast – The cannabis world is experiencing another major change. So what does the future of cannabis look like after the rescheduling?

The Drug Enforcement Administration (DEA) is requesting a cannabis redetermination. The expected rescheduling follows the August 2023 recommendation from the Department of Health and Human Services (HHS), based on FDA's scientific support for the rescheduling, that cannabis be reclassified under Schedule III of the Controlled Substances Act. Cannabis remains a Schedule I substance, having originally been classified as such “temporarily” by the Controlled Substances Act of 1970. Schedule I drugs are defined as drugs that have no currently accepted medical use and a high potential for abuse, which also includes other Schedule I drugs such as heroin and LSD (although cocaine, fentanyl, and other potentially dangerous drugs are listed in less restrictive drug schedules ). Cannabis' status as a Schedule I drug has long been criticized, particularly as more U.S. states legalize cannabis for medical and recreational use.

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From a consumer perspective, debt consolidation will not actually legalize cannabis. At least not in a way that would force states where cannabis is currently banned to change course immediately as a direct result of re-planning. Instead, these states are likely to maintain cannabis prohibition (although this significant step could encourage additional states to legalize). Likewise, states with state-legal cannabis programs are unlikely to see immediate change from a consumer perspective, despite further regulation or even a reduction in product prices, since cannabis is no longer subject to Section 280E of the Internal Revenue Code (see in detail below). could follow soon.

Photo by 2H Media via Unsplash

On the business side, debt restructuring continues. Falcon Rappaport & Berkman LLP reviewed the process and results.

Steer

The most significant consequence of the cannabis re-regulation will be the immediate removal of cannabis from the scope of IRC Section 280E, which arguably represents the greatest burden on state-legal cannabis operators. Section 280E prohibits cannabis businesses from writing off many business expenses when calculating their net income, which has resulted in significantly higher taxes compared to similar non-cannabis businesses. Instead, Section 280E only allows a cost of goods sold (COGS) deduction for any business dealings in controlled substances (e.g., drugs listed on Schedule I or Schedule II). Although cannabis businesses operate under state law programs, they are considered a “trade” and cannot claim normal business deductions. Allowing cannabis businesses to deduct all ordinary and necessary business expenses, not just cost of goods sold, will help level the playing field with almost all other legal businesses.

Federal illegality

As discussed from a consumer perspective, the reclassification of cannabis does not impact the overall federal illegality of cannabis. This means that state-legal cannabis businesses are not automatically federally legal, as their federal Schedule III illegality continues. While Schedule III drugs may be legally prescribed and sold under federal law, the various restrictions (e.g., the required FDA approval for such Schedule III drugs and a distributor's DEA registration) mean that your average pharmacy, even medical Pharmacies, continuing to be federal in nature, will not be compliant. For the same reasons, reclassification to Schedule III does not mean that marijuana grown under state programs can be sold in interstate commerce. Marijuana products, even under Schedule III, are only federally legal if they are federally approved, and to date only three FDA-approved cannabis-based medications have been developed (Marinol, Epdiolex and Syndros).

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Intellectual Property and Cannabis Trademarks

The United States Patent and Trademark Office (USPTO), the agency charged with examining federal trademark applications, has generally required that use of a mark be lawful under federal law in order to obtain a federal trademark registration under the US Trademark Act (see Examination Guide 1) . -19). The federal illegality of cannabis has therefore prevented trademark registration associated with most cannabis products. Unfortunately, rescheduling cannabis will not solve this problem. Even in Schedule III, cannabis products would need to be permitted under federal law, with FDA approval required for legal use of a Schedule III drug.

Eligibility for Federal Bankruptcy Protection

Currently, plant-touching cannabis companies are not eligible for federal bankruptcy protection. That's because U.S. Bankruptcy Code requires that bankruptcy plans “be proposed in good faith and are in no way prohibited by law.” Because even federally regulated cannabis companies violate the federal Controlled Substances Act (CSA), they are disqualified. Unfortunately, a debt restructuring to Schedule III of the CSA alone is unlikely to remove this obstacle to insolvency. While some have argued otherwise, the fact is that in order to manufacture, distribute, or dispense a Schedule III controlled substance, companies must be registered with the Drug Enforcement Administration (“DEA”). Companies or individuals not registered with the DEA are not authorized to manufacture, distribute or distribute it. This means that breaches would likely constitute an unlawful act under the CSA. Consequently, the delinquent company's attempt to voluntarily file for federal bankruptcy protection will likely result in the U.S. Trustee's Office dismissing the case.

Given the recent trend in bankruptcy courts to allow the distribution of cannabis assets in one step, a federal debt restructuring could well lead to a more liberal approach to the administration of bankruptcy cases, making bankruptcy judges more willing to look beyond the issue of marijuana's federal illegality.

The status quo

There are several aspects of the existing cannabis industry that would not immediately change with the addition of cannabis to Schedule III. Ongoing banking problems, including lack of access to standard loans and lines of credit from commercial banks, would likely continue; Difficulties in processing cannabis transactions due to the fact that major credit card companies such as Visa, Mastercard and others are still unlikely to service marijuana businesses; general federal illegality; and the criminalization of cannabis (and the continued incarceration of certain offenders) in prohibition states would remain in place even after the replan.

While many had hoped for cannabis to be delisted, the change in stance from the DEA, a long-time opponent of cannabis reform, is no small feat.

Terran Cooper is a regular contributor to The Fresh Toast. He is part of Falcon Rappaport & Berkman LLP. This article was developed in part with the help of Andrew Cooper and Matthew Foreman.