Cannabis Industry Cautiously Optimistic Following US Election
With the US election decided (with the exception of two Senate races in Georgia, where a runoff election will be held on January 5th), businesses, investors and counsel are evaluating the implications of a Democratic presidency for the cannabis industry. President Elect Joseph Biden has indicated that cannabis decriminalization will be a priority for his administration and Democrats in both the Senate and the House of Representatives have pledged their support for full legalization. The success of recent ballot measures legalizing cannabis in four states also indicate that legalization is gaining acceptance among voters across the US.
Nonetheless, cannabis legalization remains highly politicized and, as addressed below, will likely require Congress to act. Absent Democratic victories in the Georgia run-off election, the Senate will remain in Republican hands, making full legalization in the next few years unlikely.
State advocates of cannabis legalization have made steady progress in recent years. Including successful ballot measures in Arizona, Montana, South Dakota and New Jersey, 15 states have now legalized cannabis for recreational use while a further 36 states permit cannabis use for medical purposes.
Despite growing acceptance of legalization at the state level, cannabis remains illegal under the federal Controlled Substances Act (the “CSA”) and, as a result, businesses continue to face barriers to entry into the US cannabis industry. Most significantly, cannabis-related businesses (“CRBs”) struggle to access banking services and investors due to obligations imposed on financial institutions subject to the Bank Secrecy Act of 1970 (the “BSA”). In particular, the BSA requires covered financial institutions to assist federal government agencies in detecting and preventing money laundering. Knowingly engaging in monetary transactions involving the proceeds of certain unlawful activities, including the sale of cannabis, is a crime under federal anti-money laundering law, discouraging financial institutions from serving CRBs.
Despite the federal prohibition on the sale of cannabis, recent administrations have taken a lenient approach to its enforcement. Under the Obama administration, US Deputy Attorney General James Cole issued a memorandum, known as the Cole Memorandum, stating that the Department of Justice would not enforce the prohibition on the sale of cannabis in states that have legalized it in some form, except where failing to do so would undermine certain federal priorities. The Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) simultaneously issued guidance advising financial institutions on doing business with CRBs without triggering BSA enforcement, although it neither legalized doing business with CRBs nor ruled out enforcement against such institutions. Although the Trump administration rescinded the Cole Memorandum, FinCEN subsequently confirmed its guidance.
Other recent victories for the cannabis industry include the 2018 Farm Bill, which removed hemp from the definition of marijuana under the CSA, and, in 2019, the US Securities and Exchange Commission’s approval of cannabis-related exchange trades funds listing on US exchanges, subject to certain requirements.
While the above developments evidence the gradual acceptance of cannabis and CRBs at the federal level, friction with state law and occasional policy reversals mean that the waters remain murky. It is unsurprising, therefore, that many in the cannabis industry pin their hopes on the Biden administration and the incoming Congress to push through legalization.
Legalization by the Biden Administration
The President Elect has expressed his support for the decriminalization of cannabis and the legalization of cannabis for medical use. However, he has also indicated that he would reserve the decision to legalize cannabis for recreational use to the discretion of individual states.
Despite tentative support for legalization, it is unlikely that the Biden administration could achieve their objectives without the support of Congress. Currently, the CSA classifies cannabis as a Schedule I drug, together with heroin, LSD, ecstasy and other substances described as having a high potential for abuse and no accepted medical purpose. The Biden Administration could not remove cannabis from the CSA entirely without seemingly encroaching on Congress’ exclusive power to legislate. Arguably, however, they could reclassify cannabis under the CSA, and in fact have voiced support for reclassifying cannabis as a Schedule II substance in order to promote further research of the drug and its effects. A further reclassification of cannabis as a Schedule III or a Schedule IV substance would enable CRBs to claim certain business expenses under IRS Section 280E, delivering a significant win for the cannabis industry.
Even if the Biden administration were to reclassify cannabis under the CSA, however, sales of the drug would require a Drug Enforcement Agency-granted license and a doctor’s prescription. As US CRBs currently operate based on a recreational use model, this would prove an unattractive outcome for the industry. Furthermore, federal law would continue to clash with state law.
Legalization by Congress
In light of the above, it is Congress, rather than the President Elect and his administration, that will likely need to legalize cannabis at the federal level. Following the recent election, Democrats have retained control of the US House of Representatives, opening a path to legalization. In fact, the current House of Representatives has already approved the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (the “MORE Act”) which, among other matters, would remove cannabis from the CSA entirely. The current Republican-controlled Senate is unlikely to approve the bill, however, and President Trump is equally unlikely to sign it into law.
The fate of legalization may therefore rest on the outcome of the run-off election for Georgia’s two seats in the Senate. Currently, Democrats hold 48 seats to Republicans’ 50 seats. However, Democratic wins in Georgia would produce an even split in the Senate, with neither party holding a majority of seats. In such a scenario, were a Senate vote to result in a tie, Vice President Elect Kamala Harris would cast the tie-breaking vote, all but assuring the passage of the MORE Act or related efforts to legalize cannabis at the federal level. Once approved by both houses of Congress, President Biden would almost certainly sign the bill into law.
In addition to the MORE Act, the current Congress has made other efforts to legalize cannabis or make life easier for CRBs, which the 117th Congress may revisit upon taking office. Such efforts include the Secure and Fair Enforcement Act (the “SAFE Banking Act”), which would allow financial institutions to do business with CRBs without exposing them to federal sanctions. Democrats have included certain of the SAFE Banking Act’s provisions in the COVID-19 relief package currently subject to negotiation in the Senate. Likewise, the Strengthening the Tenth Amendment Through Entrusting States Act (the “STATES Act”) was introduced in 2018 with bipartisan support and would amend the CSA to exempt federal enforcement against individuals or businesses violating the CSA but complying with applicable state law. While the STATES Act offers the best chance of approval by a Republican-controlled Senate, the bill has languished while Democrats pursue broader measures under the MORE Act.
The movement to legalize cannabis at both federal and state levels has gained momentum in recent years and produced significant victories for the cannabis industry. Nonetheless, the CSA remains the major barrier to CRBs engaging openly and efficiently with service providers and investors. Despite hopes that the Biden Administration will push reform, Congress must ultimately lead the charge. With this in mind, all eyes are on the outcome of the run-off election for Georgia’s two seats in the Senate.