Politics
DEA Is Taking On The Role Of Marijuana Regulator Under Trump’s Rescheduling Move (Op-Ed)
“The cannabis industry spent years pursuing federal legitimacy. What operators are now discovering is that legitimacy often comes with regulation.”
By Joshua S. Bauchner and Marky Suazo, Mandelbaum Barrett PC
For many years, marijuana businesses primarily answered to state regulators. Now, under changes to federal policy being rolled out by the Trump administration, they will answer to the Drug Enforcement Administration (DEA).
That change began when the Department of Justice reclassified state-licensed medical marijuana from Schedule I, the federal classification reserved for substances deemed to have no accepted medical use, to Schedule III under the Controlled Substances Act. Schedule III consists of substances recognized as having accepted medical uses and usually carries fewer restrictions than Schedule I. There are also parallel, but separate, proceedings regarding the broader federal treatment of marijuana.
Nearly all the attention regarding these developments has focused on the potential benefits of rescheduling, including tax relief and greater institutional acceptance. But another important consequence has escaped the limelight: the federal government’s increasing involvement in the day-to-day regulation of the cannabis industry.
The industry’s challenge is not just whether federal reform will occur; it is already underway. The challenge is determining how to operate, how to invest and how to grow while the rules governing that reform are still being developed. Indeed, we recently spoke with a marijuana licensed client who is considering pulling up stakes in the in the face of competition across the street: a liquor store selling intoxicating hemp beverages.
Rescheduling Was Only The Beginning
DOJ’s decision to move state-licensed medical marijuana to Schedule III could have meaningful implications for operators. Most notably, it might provide relief from Section 280E of the Internal Revenue Code, which generally prohibits businesses trafficking in Schedule I or Schedule II substances from deducting ordinary business expenses.
Rescheduling could also improve the industry’s standing with investors, lenders, insurers and other institutions that have remained cautious because of marijuana’s federal status. For businesses navigating tight margins and limited access to capital, those developments could be significant.
But rescheduling is not legalization. Marijuana remains a federally controlled substance, and broader questions regarding federal cannabis policy remain unresolved. DOJ’s recent action specifically addressed state-licensed medical marijuana, while broader proceedings concerning marijuana’s federal classification continue.
More importantly, rescheduling appears to be ushering in a new era of federal oversight.
DEA Is Becoming A Cannabis Regulator
For most of the modern cannabis industry’s existence, operators focused primarily on state licensing agencies, cannabis control boards and state compliance requirements. Understandably, DEA was generally viewed as an enforcement agency, not as a day-to-day industry regulator. That dynamic might change.
For the most part, cannabis operators largely played on a field governed by state regulators. DEA was there, but mostly on the sidelines. As federal reform evolves, the referees will change, and businesses should expect the rules and expectations to evolve along with them.
As part of the emerging federal framework, the government has begun incorporating state-licensed medical marijuana businesses into a DEA registration system intended to bring operators within a formal federal regulatory structure. Businesses seeking DEA registration are required to provide detailed information concerning ownership, operations, inventory controls and related compliance matters.
Many operators already provide similar information to state regulators. Nevertheless, submitting information to the federal government and preparing for ongoing federal oversight represents a different compliance relationship.
The cannabis industry spent years pursuing federal legitimacy. What operators are now discovering is that legitimacy often comes with regulation.
That does not necessarily mean increased DEA involvement will result in increased enforcement. It does mean that cannabis businesses may increasingly be evaluated on whether their systems can withstand both state and federal scrutiny. Recordkeeping, ownership disclosures, inventory controls and operating procedures may affect not only regulatory compliance but also financing opportunities, investor diligence, acquisition activity and enterprise value.
Businesses Are Being Asked To Plan Before The Rules Are Clear
A few important questions remain unanswered.
Now, many cannabis businesses are building a plane while flying it. Companies must continue operating, expanding, raising capital, hiring employees and serving customers even as regulators are actively developing the framework that may govern the industry’s next phase.
Does every state-licensed medical marijuana business need to register with the DEA? Will registration become relevant to how federal agencies administer the benefits associated with Schedule III treatment? How will regulators address businesses that operate in both medical and adult-use markets? Will registration and inspection standards be applied consistently across DEA regional offices?
For operators, these are not academic questions. Clients call all the time asking these questions noting it’s nearly impossible to plan—never mind operate on a daily basis—in the face of all this uncertainty.
Whether expanding into a new market, raising capital, pursuing acquisitions or restructuring operations, cannabis businesses face the same challenge: assessing risk when federal expectations remain unclear.
The unpredictability is especially significant for multi-state operators. Medical and adult-use activities often share facilities, personnel, inventory systems and compliance infrastructure. If federal regulators ultimately require greater separation between those activities, businesses will face difficult operational decisions and significant compliance costs.
Cannabis businesses have never feared regulation. The industry has been regulated for years. The difficulty stems from stems from the attempt to plan for the future when critical questions remain unanswered.
The Industry Needs Clarity
Additional guidance from DEA would provide much needed clarity across the industry.
Most businesses do not expect regulatory perfection. They simply need a reliable map. At the moment, many cannabis operators know the industry is headed toward greater federal involvement, but they still lack a clear roadmap for getting there. Many operators are less concerned about whether federal oversight is coming than they are about what it will look like.
Clear direction regarding things like registration requirements, inspection standards and the treatment of businesses operating across both medical and adult-use markets would allow operators to make informed decisions and develop compliance programs around identifiable expectations. Additionally, greater consistency among regional offices would further reduce uncertainty.
Federal-state coordination is equally important. State regulators have spent years developing systems governing ownership, security, inventory tracking, testing and distribution. Federal policy should build upon those frameworks wherever possible instead of creating duplicative or conflicting requirements.
For example, imagine a multi-state operator deciding whether to acquire a medical cannabis business, expand into a new market or invest in additional compliance infrastructure. Those decisions require large capital raises and long-term planning. If federal regulators decide to adopt standards that differ from current state requirements, the entire analysis may need to be revisited.
In the meantime, businesses cannot afford to wait for complete certainty. Operators should review ownership structures, evaluate governance and compliance systems, assess recordkeeping practices and determine whether their existing operations are prepared for increased federal scrutiny.
The question cannabis businesses will face is not whether the federal government will become involved in the industry. It already has. The more important question is whether operators will treat that reality as a future concern or begin preparing for it today.
Federal reform presents meaningful opportunities for the cannabis industry. Realizing those opportunities, however, will require something every business depends on: enough regulatory clarity to invest, operate and grow with confidence.
Joshua S. Bauchner is Chair of the Cannabis, Hemp, and Psychedelics Practice Group at Mandelbaum Barrett PC in New York and New Jersey. Marky Suazo is Counsel in the Firm’s Cannabis, Hemp, and Psychedelics Practice Group.
