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. May 16, declaring that the U.S. Department of Justice would indeed reclassify cannabis, and within hours, cannabis-related stocks began rising amid the growing excitement.

“Today’s step is another historic step moving forward,” Poseidon Investment Management co-founder Emily Paxhia told Yahoo! Finance on an episode of Market Domination. “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.

Multi-state operators (MSOs) would benefit the most from the Schedule III classification, like Canopy Growth, Curaleaf Holdings, Green Thumb Industries, and Trulieve Cannabis, with operations in about three dozen states that allow cannabis sales. Shares of Canopy Growth, an enormous Canadian cannabis producer that trades on the New York Stock Exchange, rose 15%, to $11.95, after the tweet, Barron’s reports.

The reclassification of cannabis doesn’t fix the gap between federal and state law, and it sparked some negative feedback of 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, who heads the National Cannabis Industry Association. “Now it’s time for Congress to enact legislation that would protect our industry.”

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 as well to 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.

It’s important to keep in perspective the overall picture. Despite the recent gains seen by cannabis MSOs, several cannabis-related stocks are 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, Reuters reports.

A 60-day commitment period will take place for a space for public input.

The Justice Department will take comments on the proposal after it appears in the Federal Register. A final rule would have to be issued before the reclassification would take effect. The process can be lengthy,  and it must undergo a public comment period before it can be implemented, 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 the probate changes in tax policy that is near. Legal advisors are expecting the limitations of tax code Section 280E will change significantly now that cannabis is moving to Schedule III of the Controlled Substances Act

Duane Morris LLP & Affiliates, for instance, provided an explainer that indicates Section 280E provides that:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Once cannabis is rescheduled as a Schedule III substance, Section 280E will not apply to that company’s tax return and additionally, the company would no longer be banned from deducting expenses on tax returns like any other type of legal business.

Kilpatrick Townsend & Stockton LLP provided a Truth vs. Fiction article that explains  reclassification, in reality, it will probably take over a year for major changes to roll out. But one of the biggest lies or rumors, they explained, is that Schedule III will wipe out existing state cannabis markets. No one knows that at this point, and state cannabis markets have always operated in the gray market.

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Nevada officials are continuing to approve more consumption lounge applications, with six more conditional licenses approved by the Nevada Cannabis Compliance Board (CCB) for various cannabis companies.

On Oct. 24, the CCB discussed approval for a variety of consumption lounge applications. The chosen businesses in this round include Curaleaf Holdings, Inc.; Green Thumb Industries, Inc.; Desert Evolution, LLC; Higher* Archy, LLC; NevadaPure, LLC; and TGIG, LLC.

Curaleaf Holdings, one of the biggest cannabis companies in the world, received one of the licenses for its subsidiary, Tryke Companies, which controls Reef Dispensaries. Curaleaf acquired Tryke in October 2022.

Green Thumb Industries is also a large multi-state operator in the cannabis industry, which received a license for its subsidiary, Integral Associates. The company plans to open up a lounge on The Strip.

In June 2022, the CCB announced their decision to approve new regulations for consumption lounge regulation, to “lay groundwork for greater inclusion within Nevada’s cannabis industry.” At the time, they stated that they would eventually issue up to 65 licenses (up to 45 would be connected to existing dispensaries, while the rest would be awarded to independent consumption lounges). In October 2022, the CCB announced that there were 20 prospective consumption lounge applicants in the running for a license. Once approved, licensees have one year to get all of the necessary adjustments and regulatory requirements taken care of in order to open.

In June 2023, the CCB initially approved the first three conditional licenses to Planet 13 Holdings, The Venue at Sol Cannabis, and Cheyenne Medical Sammy Davis dba [doing business as] Thrive Cannabis Marketplace. In July, LA Lounge LLC was awarded another license as the first consumption lounge not tied to a dispensary. By August, three more were approved, including Deep Roots Harvest, Global Harmony, and KV Group.

That brings the current number of approved conditional licenses to 15.

Thrive Cannabis Marketplace CEO Mitch Britten said in September that they’re excited to begin working on their storefront location on The Strip. “We are thrilled to be among the first in the state to do so,” said Britten. “This is a huge milestone for us, and we can’t wait to finish this incredible new offering in the Vegas valley.”

On Nov. 1, Planet 13 Holdings published a press release detailing the progress and concepts for its consumption lounge, called DAZED!. Decorated with “bong chandeliers” and VIP booths for exclusive cannabis-infused cocktails, the venue will have 3,000 square feet of space used to sell food, allow consumption, and feature entertainment. “We’re thrilled to share our exciting plans for our trailblazing cannabis consumption lounge. From day one, our goal has been to out-Vegas-Vegas, and this is another big step in that direction. It’s an extraordinary space for cannabis novices, connoisseurs, tourists and locals to enjoy cannabis while experiencing world-class entertainment,” said Planet 13 Co-CEO, Larry Scheffler. “One of the main goals for this year was to increase the utilization of the SuperStore to drive more traffic, and revenue while improving cost structure and operating margins. We are executing on that goal while continuing to define Planet 13 as a differentiated retail brand with national recognition.” Unsurprisingly, the venue is setting its sights on opening by April 20, 2024.

A few other cannabis consumption lounge licensees intended to begin operation by this summer, but experienced multiple delays.

The Las Vegas Convention and Visitors Authority stated that 38.8 million people visited Las Vegas alone in 2022, and legal consumption lounges are poised to become a big attractor for many tourists. Other facets of the Nevada cannabis industry are also growing, including the entrance of musician Future and his cannabis line, Evol by Future, which is created in partnership with Redwood Cultivation.

In other states, consumption lounges are not progressing at the same pace as Nevada. Michigan is home to a few consumption lounges, including Kalkusha (located in the city of Kalkaska), Hot Box Social (located in Hazel Park), and Rolling Embers.

In California, Gov. Gavin Newsom recently vetoed Assembly Bill 374 which would have allowed cannabis cafes similar to the way that they have previously operated in Amsterdam, the Netherlands. The bill was initially introduced by Assemblymember Matt Haney earlier in 2023, and would have permitted lounges to sell non-infused, pre-packaged food and drinks to customers. “Lots of people want to enjoy legal cannabis in the company of others. And many people want to do that while sipping coffee, eating a scone, or listening to music,” Haney said in February 2023. “There’s absolutely no good reason from an economic, health, or safety standpoint that the state should make that illegal. If an authorized cannabis retail store wants to also sell a cup of coffee and a sandwich, we should allow cities to make that possible and stop holding back these small businesses.”

After vetoing the bill, Newsome explained that the bill conflicted with current California law to provide a smoke-free workplace to any employees in the state. “Protecting the health and safety of workers is paramount. I encourage the author to address this concern in subsequent legislation,” Newsom said. “For this reason, I cannot sign this bill.”

Haney posted a response on X. “The voters of California have already decided to legalize the smoking of cannabis in public dispensaries. AB 374 just allows businesses where smoking is already happening to sell coffee and food and hold live shows,” Haney wrote. “I appreciate and respect the Governor’s concerns about worker’s health. And I’m looking forward to working closely with his office and with labor leaders to make sure we get this right when I introduce the bill again next year.”

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