The Cannabis world is going through another big change with the potential of rescheduling – but what does it really mean?”

The Fresh Toast – The cannabis world is going through another major change, so what is the future of cannabis after rescheduling?

The Drug Enforcement Administration (DEA) is moving for cannabis to be rescheduled. The anticipated rescheduling follows the Department of Health & Human Services’ (HHS) August 2023 recommendation, based on scientific support for the rescheduling from the FDA, that cannabis be rescheduled under Schedule III of the Controlled Substances Act. Cannabis has remained a Schedule I substance since it was originally “temporarily” classified as such by the Controlled Substances Act of 1970. Schedule I drugs are defined as having no currently accepted medical use and a high potential for abuse, with other Schedule I drugs including heroin and LSD (despite cocaine, fentanyl, and other potentially dangerous drugs being in less restrictive drug schedules). The status of cannabis as a Schedule I drug has long been criticized, particularly as more and more U.S. states legalized cannabis for medical and recreational use.

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From a consumer standpoint rescheduling will not actually legalize cannabis. At least not in a way forcing States in which cannabis is currently prohibited to immediately change course as a direct result of rescheduling. Instead, those States are likely to continue cannabis prohibition (though this momentous step may influence further states to legalize). Similarly, states with state-legal cannabis programs will likely not immediately change from a consumer perspective, although further regulation or even a reduction in product pricing due to cannabis no longer being subject to section 280E of the Internal Revenue Code (discussed in detail below) may soon follow.

There is more going on the business side with rescheduling. Falcon Rappaport & Berkman LLP has reviewed the process and outcomes.

Taxes

The most significant consequence of cannabis rescheduling will be the immediate removal of cannabis from the reach of I.R.C. Section 280E, which is arguably the greatest burden on state-legal cannabis operators. Section 280E prohibits cannabis businesses from writing off many business expenses when calculating their net profit, which has resulted in vastly higher taxes as compared to similar non-cannabis businesses. Instead, section 280E only permits a deduction for the Cost of Goods Sold (COGS) for any business trafficking in any controlled substances (i.e., drugs listed on Schedule I or Schedule II). Despite cannabis businesses operating under state-legal programs, they are considered “trafficking” and cannot take ordinary business deductions. Allowing cannabis businesses to deduct all ordinary and necessary business expenses, and not just COGS, will help to even the playing field with nearly every other legal business.

Federal Illegality

As discussed from a consumer standpoint, rescheduling cannabis does not affect the overall federal illegality of cannabis. This means that state-legal cannabis businesses will not automatically be federally legal, as their federal illegality will continue under Schedule III. While Schedule III drugs may be legally prescribed and sold under federal law, the various restrictions (such as requiring FDA approval of any such Schedule III drug and DEA registration of a distributor) mean that your average dispensary, even medical dispensaries, will still be federally non-compliant.  For these same reasons, the reclassification to Schedule III does not mean that marijuana grown pursuant to state programs can be sold in interstate commerce. Marijuana products, even under Schedule III, are only federally legal if they are federally approved and there are only three FDA-approved cannabis-based drugs developed to date (Marinol, Epdiolex, and Syndros).

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Intellectual Property & Cannabis Trademarks

The United States Patent and Trademark Office (USPTO), the agency tasked with examining federal trademark applications, has generally required use of a mark to be lawful under federal law in order to receive federal trademark registration under the U.S. Trademark Act (see Examination Guide 1-19). The federal illegality of cannabis has thus prevented trademark registration in connection with most cannabis products. Unfortunately, cannabis rescheduling will not remedy this issue. Even in Schedule III, cannabis products would have to be federally lawful, with lawful use of a Schedule III drug requiring FDA approval.

Entitlement to Federal Bankruptcy Protection 

Currently, plant-touching cannabis companies are not entitled to federal bankruptcy protection. That is because the U.S. Bankruptcy Code requires that bankruptcy plans are “proposed in good-faith and not by any means forbidden by law.” Since even state-regulated cannabis companies violate the federal Controlled Substances Act (CSA), they are disqualified. Unfortunately, rescheduling to Schedule III of the CSA alone will not likely solve that barrier to bankruptcy. While some have argued otherwise, the fact is that to manufacture, distribute, or dispense a Schedule III Controlled Substance, businesses must be registered with the Drug Enforcement Administration (“DEA”). Any business or person not registered with the DEA is not authorized to manufacture, distribute, or dispense it. Meaning that violations would likely constitute an unlawful act under the CSA. Consequently, an attempt by the non-complying business to commence a voluntary petition seeking federal bankruptcy protection will likely result in a motion to dismiss the case by the U.S. Trustee’s Office.

However, in light of a recent trend among bankruptcy court’s in allowing ‘one-step-removed’ distribution of cannabis-related assets, federal rescheduling may very well result in a more liberalized approach to administering bankruptcy cases so that bankruptcy judges will be more willing to look past the issue of marijuana’s federal illegality.

Status Quo

There are several aspects of the existing cannabis industry which would not be immediately changed by rescheduling cannabis to Schedule III. Ongoing banking issues including the lack of access to standard commercial bank loans and lines of credit would likely persist; difficulties in processing cannabis transactions due to the reality that major credit card companies like Visa, Mastercard and others will likely still not service marijuana businesses; general federal illegality; and the criminalization of cannabis (and continued incarceration of certain offenders) in prohibitive states would remain following rescheduling.

While many had hoped for the de-scheduling of cannabis, the change in stance of the DEA, a longstanding adversary 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.

Once upon a time in the enchanting Bieszczady Mountains of Poland, nestled among the breathtaking landscapes, a happy hippie found solace and joy at a vibrant rainbow people gathering. Dancing to the rhythm of life and embracing the mystical aura of the full moon, the air was filled with laughter, love, and the sweet aroma of marijuana. As the flames flickered and the smoke swirled around the mesmerizing fireplace, the happy hippie couldn’t help but feel a deep connection to nature and a sense of unity with fellow free spirits.

Having studied anthropology at the prestigious Oxford University, the happy hippie had developed a profound understanding of the cultural significance of plants like marijuana and their role in human rituals and traditions. For centuries, cannabis had been used by various cultures worldwide for spiritual, medicinal, and recreational purposes. It was a symbol of peace, relaxation, and a gateway to self-discovery.

As the happy hippie immersed themselves in the joyful ambiance of the rainbow gathering, they couldn’t help but reflect on the wisdom passed down through generations regarding the responsible use of marijuana. They understood the importance of education, awareness, and respect for the plant and its potential effects. It was a harmonious balance between indulging in the euphoric bliss of cannabis and honoring its sacred nature.

In this vibrant atmosphere of love and acceptance, the happy hippie felt inspired to share their knowledge and experiences with others. Their mission was to spread positivity, promote responsible cannabis use, and debunk the misconceptions surrounding it. Through their words, they aimed to empower individuals to make informed choices and embrace the holistic benefits of marijuana.

With every dance move and every puff of the joint, the happy hippie delved deeper into the profound connection between nature, spirituality, and cannabis. They reveled in the healing properties of the plant, which had been used to alleviate physical and emotional discomfort for centuries. From relieving pain to reducing anxiety, marijuana had the power to enhance one’s well-being and bring moments of pure bliss.

As the full moon illuminated the gathering, the happy hippie felt a surge of creative energy. They knew that their words could ignite a spark of curiosity and inspire others to explore the world of marijuana with an open mind and a responsible approach. They envisioned a society where cannabis was embraced not only for its recreational potential but also for its therapeutic properties and contribution to personal growth.

With the fire crackling and the rhythmic beats echoing through the mountains, the happy hippie felt a deep sense of gratitude for the magical moments experienced during this vibrant gathering. They realized that the true essence of being a happy hippie was not just about indulging in the pleasures of life but also about spreading love, acceptance, and knowledge.

And so, as the night wore on and the embers glowed, the happy hippie continued their journey, carrying the spirit of the rainbow gathering with them. They knew that their purpose in life was to inspire, educate, and create a positive impact. With the Bieszczady Mountains as their backdrop and the wisdom of the rainbow people in their heart, the happy hippie embraced the journey ahead, ready to share the joy of marijuana and the beauty of a harmonious existence.

As the full moon set behind the mountains, the happy hippie bid farewell to the rainbow gathering, knowing that the memories and connections made would forever be cherished. With a renewed sense of purpose, they embarked on their next adventure, eager to spread happiness and enlightenment wherever they went.

For the happy hippie, marijuana was not just a plant; it was a symbol of freedom, unity, and a gateway to a higher consciousness. And as they continued dancing to the rhythm of life, the sweet scent of marijuana trailing behind, the happy hippie radiated joy and positivity, leaving a trail of inspiration in their wake.

Remember, dear reader, to embrace the happiness within, to dance to the beat of your own drum, and to find moments of serenity in the simplest of pleasures. May the spirit of the happy hippie guide you on your own journey of self-discovery, and may the sweet aroma of marijuana always remind you of the beauty and magic that surrounds us.

With love and gratitude from the Bieszczady Mountains, The Happy Hippie

Germany had a record 34.6 tons of cannabis imported in 2023 for medicinal and research uses, a significant increase from previous years. This inflow highlights how Europe’s biggest medical marijuana market—which is federally regulated—is changing, as seen by the increasing interest that foreign organizations are showing in Germany’s cannabis sector. Notwithstanding a little slowdown in growth relative to prior years, the notable rise in imports underscores the nation’s critical position in molding the world’s cannabis industry.

The surge in cannabis imports coincides with significant shifts in Germany’s regulatory framework, particularly the abolition of the previous cultivation quota system. This system, which restricted domestic cultivation to a select few companies, compelled the nation to heavily rely on imports to meet demand. With the introduction of more flexible conditions for cultivating medical cannabis under the new legislation, Germany aims to reduce its dependence on foreign imports, ushering in a potentially transformative era for the domestic cannabis industry.

End of Cultivation Quota System: A New Era for German Cannabis

The abolition of Germany’s growing quota system, which marks a watershed moment in the country’s cannabis industry, promises a paradigm shift in cultivation dynamics. Only three companies were awarded permits to develop medical marijuana under the previous system, following a stringent application process. As a result, their total output was limited to 10,400 kg over four years. As a result, the shortage of supplies from domestic farms forced a considerable reliance on imports to meet rising demand.

However, with the latest regulatory revision, enterprises may now apply directly to the Cannabis Agency for permission to produce medicinal marijuana. This decision marks a shift from the tight quotas of the past, providing a more streamlined and accessible route for firms to engage in cannabis growing. Peter Homberg, a major person in Germany’s cannabis business, believes that the increased flexibility in cultivation conditions will progressively reduce the need for foreign imports, opening the path for more self-sufficiency in the home market.

Once the growing quota system is removed, there will be a great deal of freedom for expansion and innovation in the German cannabis industry. By allowing a greater variety of companies to engage in cultivation, the regulation change fosters a more competitive environment that is advantageous to development and diversity. Moreover, this is a significant step toward aligning German cannabis regulations with evolving international standards, therefore enhancing the nation’s competitiveness in the global cannabis market.

While the transition away from import dependence may take time to materialize fully, the dismantling of the cultivation quota system sets the stage for a transformative journey towards self-sustainability. As companies seize the opportunity to expand their cultivation operations under the new regulatory framework, Germany inches closer to realizing its vision of a thriving and resilient domestic cannabis industry.

Imports in Flux: Dynamics of Germany’s Medical Cannabis Market

Germany is a significant importer of medicinal cannabis, but its position is under examination due to changing market dynamics and regulatory environments. In the past, the country has been a vital market for foreign exporters, providing profitable prospects in the largest federally regulated medicinal marijuana industry in Europe. Nonetheless, recent legislative modifications, such as the removal of marijuana from the list of illegal substances, portend a possible reorganization of Germany’s import market.

The elimination of the requirement for patients to get specific prescriptions for medicinal cannabis has simplified access to the drug by removing marijuana off Germany’s list of illegal substances. Standard prescriptions, on the other hand, are sufficient, streamlining the procedure and maybe stimulating demand in the medical cannabis industry. This legislative change is anticipated to rebalance the import-export dynamics, which might change the way cannabis goods enter Germany and change international export tactics.

It’s unclear how long Germany will continue to rely on cannabis imports despite these legislative changes. The timetable for reaching self-sufficiency is still unclear, even though it is expected that domestic cultivation and the elimination of regulatory obstacles would eventually lessen reliance. The future course of Germany’s medicinal cannabis market may be significantly influenced by strategic alliances and infrastructure investments made by industry players as they traverse this transitional period.

Fostering Domestic Growth: Germany’s Cannabis Cultivation Outlook

The cannabis industry is seeing a radical change as Germany allows for larger-scale commercial cultivation. The possibility of obtaining cultivation permits offers domestic businesses a special chance to profit from the growing market for medical marijuana. Demecan’s managing director, Constantin von der Groeben, is upbeat about the industry’s potential for expansion and notes that his company is prepared to surpass prior production quotas in light of the current legal environment. This shift toward homegrown production represents a calculated attempt to foster self-sufficiency in the German cannabis industry. Although imports would still be necessary to meet demand right away, the granting of crop licenses indicates a more extensive commitment to developing domestic production capacity. The sector prepares for a period of innovation and growth as stakeholders look at opportunities for extended cultivation activities.

This pivot towards domestic cultivation signifies a strategic endeavor to cultivate self-sufficiency within Germany’s cannabis market. While imports may continue to fulfill immediate demand, the issuance of cultivation licenses signals a broader commitment to fostering indigenous production capabilities. As stakeholders explore avenues for expanded cultivation initiatives, the industry braces for a period of innovation and expansion, poised to redefine Germany’s role within the global cannabis market.

Nevertheless, the timeline for achieving full autonomy in cannabis cultivation remains uncertain. While strides are made towards bolstering domestic production, Germany’s reliance on imports may persist in the short to medium term. As industry players navigate regulatory nuances and operational challenges, strategic partnerships and investments in cultivation infrastructure are poised to shape the trajectory of Germany’s cannabis industry, laying the groundwork for sustained growth and innovation.

Bottom Line

Germany’s record-breaking cannabis imports in 2023 underscore the nation’s pivotal role in shaping the global cannabis industry. Regulatory changes, such as the abolition of the cultivation quota system, signal a transformative shift towards self-sufficiency in domestic cultivation. While significant progress has been made, the timeline for achieving full autonomy remains uncertain. Strategic partnerships and investments will be instrumental in navigating regulatory complexities and ensuring sustainable growth in Germany’s evolving cannabis market.

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