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Stakeholders are feeling more optimistic that relief could be on its way for the US cannabis industry, which is currently struggling with lack of access to capital, oversupply of product and a patchwork of regulatory requirements from state to state.
Bryna Dahlin (pictured), partner and chair of the cannabis industry group at Benesch, told CannIntelligence the cannabis space was “very tough” right now, citing lack of access to capital investment as the biggest challenge for her clients, particularly small businesses.
“Businesses are stuck. They need to raise money but the money’s not available. It’s partly a function of the time we’re living in but it’s also the fact that the cannabis industry has lost its shine. In the earlier days it was easier to attract investors because there was so much excitement around cannabis that a lot of people were looking to money. Those days are over,” she said.
Investors are particularly important to the cannabis industry because firms have such restricted access to sources of traditional capital such as banking due to their product’s legal status.
The level of the industry’s struggle is evident in the numbers of cultivators and dispensaries that have failed to move forward on licences that have been issued to them. In Illinois, for example (where Dahlin is based), hundreds of licences have been issued over the past two years but only 20% of the newly licensed dispensaries have opened for business, while less than 5% of the growers have been able to open their facilities.
“It’s more expensive to build a cultivation facility, so you have to raise a lot more capital,” said Dahlin. “And Illinois has kept the scale small for the craft growers, so it’s harder to make a profit and therefore harder to attract investors.”
This makes the scale of the competition from the illicit market even more of a challenge.
“Many folks across the country think, ‘Why would I go into a dispensary when I can buy the same product on the illicit market for a fraction of the cost?’” she said.
Could rescheduling lead to a brighter future?
The US Department of Health and Human Services (DHHS) has now recommended the rescheduling of cannabis from schedule 1 to the less restrictive schedule 3. The decision is currently in the hands of the Drug Enforcement Administration (DEA).
The schedule change would ease the industry’s tax burden. Cannabis firms have not been able to deduct business expenses incurred from their federal tax returns, in accordance with 26 US Code § 280E, which applies to schedule 1 and 2 drugs. Therefore, if cannabis was listed under schedule 3, it would enable them to deduct their ordinary expenses from their federal returns, as other businesses do.
“The tax burden is incredibly punitive,” said Dahlin.
But she insists that the future is brighter and is optimistic that schedule 3 will go ahead.
“The DEA has not traditionally been a friend of cannabis, and there are ways it can get around HHS’s recommendation, but it will have to accept the evidence, which should be robust regarding both the medical benefits and degree of physical or psychological dependence. It’s not nearly as dangerous as the drugs on Schedule 2, such as fentanyl” she said.
CannIntelligence’s head legal analyst Anthony Traurig also believes the rescheduling will go ahead, and predicted as much in last year’s US regulatory report.
“Seven years have passed of state medical cannabis programmes operating and expanding into 14 further states, boosting the case that there are accepted medical uses for cannabis,” he said.
“What’s more, in 2020 cannabis was moved to a less restrictive schedule under the UN Single Convention, which recognised the medical value of cannabis – a move the US voted for.
“These developments make it incredibly difficult for the DEA to claim that cannabis has no accepted medical use – a requisite to keep it in Schedule 1.”
Rescheduling cannabis, in theory, could make some financial institutions more comfortable working with state-legal cannabis businesses, though financial institutions will still ultimately have to decide their comfort level as it would remain against federal law, albeit to a lesser degree. And rescheduling will give comfort to some of those investors who have thus far stayed on the sidelines.
‘There will be winners and losers’
Federal legalisation has been the source of much speculation. Dahlin believes it’s on its way, within “10 years or less”. She believes this is being driven by increasing demand from consumers for product, a demand which is also becoming evident at the ballot box, plus there have been a run of recent wins in state legislatures.
“A significant majority of states permit medical cannabis, almost half allow adult use, and those numbers will only grow,” she said. “The train left the station years ago.”
However, some industry players are nervous about the sea change that federal legalisation will bring because it won’t benefit all stakeholders along the supply chain. Dispensaries, for example, will be less impacted because their business is driven by location, but cultivators are more likely to struggle.
“There will be winners and losers,” said Dahlin. “It will be hard for many cultivators because, once legislation is favourable, growing will eventually move to the areas where land and production is cheaper – even outside the US to South America, for example.”
Dahlin’s recommended survival strategy is to develop a strong brand, which is a challenge with such varying legal requirements for packaging from one state to another.
“In the past, companies have given less thought to branding but it really is important to come up with a look and feel that will resonate with consumers. That takes money, that takes development and marketing, but we’re definitely starting to see companies move in that direction.
“They should all be taking branding seriously because strong brands will live on – even if cultivation and manufacturing moves elsewhere.”
Bryna Dahlin advises cannabis businesses of all sizes on legal issues in the industry. She was at Benzinga Cannabis on 27th September, moderating a discussion, ‘The bud boardroom: bringing mainstream industry experience to the top cannabis companies’ with Trulieve’s Susan Thronson and Green Thumb Industries’ Wendy Berger.
– Lorraine Mullaney CannIntelligence staff
