Cannabis Stocks Skyrocket Following Biden’s Announcement of Rescheduling to Schedule

Cannabis stocks spiked immediately after President Joe Biden announced the reclassification of cannabis from a Schedule I to a Schedule III drug, endorsing the Justice Department’s recommendation. Biden posted a video on X at 1 p.m. on May 16, declaring that the U.S. Department of Justice would indeed reclassify cannabis. Within hours, cannabis-related stocks began rising amid the growing excitement.

Industry Leaders React Positively

“Today’s step is another historic step moving forward,” said Emily Paxhia, co-founder of Poseidon Investment Management, in an episode of Market Domination on Yahoo! Finance. “I think anything around cannabis reform has been very difficult for the past 10 years plus, obviously, and so anything that’s working through an ordinary process and following the steps as it should is very confirmatory.”

Familiar names of bigger players in the industry are popping up. “We’ve seen increasing volumes in the top names in the industry,” Paxhia added.

Benefits for Multi-State Operators

Multi-state operators (MSOs) stand to benefit the most from the Schedule III classification, including companies like Canopy Growth, Curaleaf Holdings, Green Thumb Industries, and Trulieve Cannabis. These MSOs have operations in numerous states that allow cannabis sales. Shares of Canopy Growth, a major Canadian cannabis producer trading on the New York Stock Exchange, rose 15% to $11.95 after the tweet, according to Barron’s.

Addressing Federal and State Law Discrepancies

The reclassification of cannabis does not resolve the gap between federal and state law, and it has sparked concerns about a potential pharmaceutical takeover. “On behalf of thousands of legal businesses operating across the country, we commend President Biden for taking this important first step toward a more rational marijuana policy,” said Aaron Smith, head of the National Cannabis Industry Association. “Now it’s time for Congress to enact legislation that would protect our industry.”

Market Reactions and Stock Performance

Forbes reports that shares of Canopy Growth Corp. ended up closing at roughly $11, an increase of over 11% on the day to a one-month high. Canadian cannabis producer Aurora Cannabis’ stock rose nearly 7%, closing Thursday at nearly $8 per share. Cannabis product manufacturer Green Thumb Industries’ stock rose nearly 3%, climbing to a high of just over $13.

Shares of Trulieve Cannabis Corp rose nearly 6% to just under $13 per share, while Tilray Brands’ shares increased by roughly 2.5% to just over $2 per share. Shares of Cronos Group also jumped over 4% on Thursday, closing at over $3 per share.

Perspective on Stock Gains

Despite the recent gains seen by cannabis MSOs, several cannabis-related stocks remain far below their 5-year highs. Curaleaf is down nearly 66% from its February 2021 high, while Tilray is down nearly 97% from its high from the same month, according to Reuters.

Public Comment Period

A 60-day commitment period will take place for public input. The Justice Department will take comments on the proposal after it appears in the Federal Register. A final rule would need to be issued before the reclassification takes effect. This process can be lengthy and must undergo a public comment period before implementation, which can take up to a year.

Tax Implications of a Schedule III Classification

Part of the excitement surrounding the reclassification move could be centered on anticipated changes in tax policy. Legal advisors expect significant changes to the limitations of tax code Section 280E, which currently restricts deductions for businesses trafficking in Schedule I and II controlled substances.

Duane Morris LLP & Affiliates explained that Section 280E provides no deduction or credit for any amount paid or incurred in carrying on a trade or business if it involves trafficking in controlled substances listed in Schedule I and II. Once cannabis is rescheduled as a Schedule III substance, Section 280E will not apply, allowing companies to deduct expenses on tax returns like any other legal business.

Future Outlook

Kilpatrick Townsend & Stockton LLP highlighted in a Truth vs. Fiction article that while reclassification will take over a year for major changes to roll out, the fear that Schedule III will wipe out existing state cannabis markets is unfounded. State cannabis markets have always operated in a gray market, and no one knows for sure what the full impact of Schedule III reclassification will be.

The cannabis industry is optimistic about the future, awaiting further developments and hoping for more rational marijuana policies at the federal level.