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By Jodi Green, Karina Bashir and Matt Brockmeier of Antithesis Law

The psychedelic ecosystem stands at a critical juncture as businesses and advocates navigate complex legal landscapes. Although the federal pathway for psychedelics faces significant hurdles, states are stepping up to create innovative frameworks for access. This article will explore developments at both the federal and state levels, as well as exciting new business opportunities arising from this evolving regulatory environment. By understanding the nuanced psychedelic legal landscape, businesses and entrepreneurs can position themselves to seize emerging opportunities.

Federal Landscape

Several significant obstacles impede the expansion of psychedelic access at the federal level. The regulatory landscape is primarily shaped by the Drug Enforcement Administration (DEA), which controls drug classification and distribution under the Controlled Substances Act (CSA), and the Food and Drug Administration (FDA), which is responsible for determining the safety and efficacy of investigational drugs.

The DEA classifies most psychedelics, including psilocybin and MDMA, as Schedule I substances under the CSA, meaning that they have no accepted medical use and a high potential for abuse. This scientifically erroneous classification, compounded by the enduring stigma of the War on Drugs, restricts the ability to conduct research and obtain approvals necessary for establishing safe and equitable national access. The DEA’s rigid approach is further highlighted by its interpretation of state and federal Right to Try laws, which were explicitly designed to expand access to investigational therapies for terminally ill patients. In 2021, the agency denied palliative care physician Dr. Sunil Aggarwal’s request for psilocybin to treat patients under these laws, reinforcing its draconian stance on psychedelics.

Aside from the DEA’s overly restrictive scheduling, one of the primary challenges to advancing psychedelic therapies is the FDA’s arduous drug development process, which is often expensive and time-consuming. Smaller companies in particular struggle with the high costs associated with getting new therapies approved. For reference, a recent study estimated that the average cost of developing a new drug was approximately $172.7 million (in 2018 dollars). FDA’s recent rejection of Lykos Therapeutics’ new drug application for MDMA-assisted therapy underscores the barriers inherent in navigating the approval process. Moreover, the utter inadequacy of the FDA and DEA’s current approach to regulating controlled substances was highlighted by the tragic death of Matthew Perry, and the mounting challenges stemming from the prescription of off-label ketamine.

Despite these obstacles, advocacy efforts are slowly shifting the tide. The FDA has expanded access to psychedelics through the Expanded Access Program, which allows patients with serious conditions to access investigational therapies such as MDMA-assisted psychotherapy for post-traumatic stress disorder (PTSD). Similarly, the FDA’s Breakthrough Therapy designation expedites research and approval processes and was granted to MDMA for PTSD in 2017, to psilocybin for treatment-resistant depression in 2018 and major depressive disorder in 2019, and to LSD in March 2024 for generalized anxiety disorder. Furthermore, the FDA released guidelines for clinical trials involving LSD and MDMA in 2023, indicating growing federal engagement with the psychedelic sector.

State and Local Efforts: A Patchwork of Opportunities and Challenges

While federal regulations evolve at a glacial pace, as was the case in cannabis, local and state-led initiatives are making headway in shaping the future of the psychedelic market. Psychedelic legislation is being introduced or enacted in numerous cities across the United States to promote research, increase therapeutic and non-therapeutic access, and reduce criminal penalties. Not less than 24 localities have deprioritized or decriminalized certain psychedelics across the country, starting with Denver in 2019. In 2020, Oregon passed the Psilocybin Services Act, becoming the first state to create a comprehensive “quasi medical” system for regulated psilocybin use. Colorado followed in 2022 with the Natural Medicine Health Act (NMHA). The NMHA expands on Oregon’s framework, and not only establishes a regulated system for supervised psilocybin use, but also includes personal use provisions, broadly decriminalizing various natural medicines, including psilocybin, psilocin, ibogaine, dimethyltryptamine, and mescaline (excluding peyote).

Psychedelic Business Opportunities and Growth

Significant opportunities exist for those willing to invest in the psychedelic space. Entrepreneurs have the opportunity to establish psilocybin service centers (also known as healing centers) in Oregon and Colorado, obtain facilitation licenses, create educational institutions, as well as enter the industry through licensed cultivation, product manufacturing, and testing labs in those locations. Colorado’s tiered licensing system is expected to result in increased demand for healing services, while offering businesses and individuals critical operational flexibility. Additionally, in both Oregon and Colorado, the need for ancillary services, such as legal, media, technology, marketing, insurance and branding support, will only continue to grow.

Entrepreneurs seeking to enter the psychedelic industry can also access legal opportunities beyond Colorado and Oregon. For example, companies focused on research and development of psychedelic therapies can collaborate with universities and private institutions. As interest in psychedelics grows, businesses providing educational programs for clinicians, therapists, and the general public can shape the industry’s future. Furthermore, wellness and retreat models focused on preparation, integration, and holistic healing are gaining traction, even in states and countries without fully established legal frameworks, offering additional avenues for growth and innovation. Therapists, coaches, and guides can offer bona fide harm reduction services to help with psychedelic preparation and integration within an appropriate protective container.

Emerging Challenges for Psychedelic Entrepreneurs

Despite the promising opportunities, significant challenges persist for entrepreneurs. In Oregon, high costs related to licensing and accessing services pose barriers for businesses and their clients, making it difficult for smaller enterprises to enter and remain viable in the market.  Similarly, in Colorado, the Department of Regulatory Agencies (DORA) recently released draft rules on license fees, raising alarms around cost and access. Moreover, the general absence of liability insurance or health insurance coverage for psychedelic services in both states creates an additional barrier for both seekers and practitioners.

Outside of Oregon and Colorado, a vast and growing underground and “grey market” for psychedelics persists. Both brick and mortar and online mushroom “dispensaries have emerged into broad daylight, despite the illegality of products on the federal and state level. Synthetic products, including those made with 4-ACO-DMT, are being sold and mislabeled as “mushroom” products, in an effort to evade the Controlled Substances Act and take advantage of a perceived loophole much like the early days of hemp-derived cannabinoids. Meanwhile, therapists, coaches, and guides are confused about how to provide bona fide harm reduction services while staying within the confines of the very grey laws.

Fragmented Regulations and Investor Uncertainty

On a broader scale, as more states establish their own unique  legal and regulatory regimes with respect to these substances, it becomes increasingly difficult for businesses to navigate the patchwork of laws and regulations that govern psychedelic access across the country. The inconsistent legislation creates uncertainty and instability and places a heavy burden on operators and investors to interpret complicated nuances between dynamic laws. For example, in Colorado, communities do not have the ability to reject the establishment of a healing center, while Oregon Measure 109 allows communities to reject the development of such centers in their county. In Oregon, potential investors face the prospect of losing their investment if communities reject healing centers, a threat highlighted by the collapse of the Synthesis Institute. Synthesis, a facilitator training program, went bankrupt after purchasing a $3.6 million property when the county voted to prevent it from establishing a psilocybin center within its jurisdiction. This nuance in policy highlights the ongoing uncertainty for businesses and investors in the psychedelic industry.

Conclusion: Navigating the Complexity & Seizing Opportunities

While drug policy reform at the federal level progresses slowly with respect to psychedelics, state-level opportunities offer arguably more promising avenues for business growth. As states like Oregon and Colorado lead the way, the psychedelic market will continue to expand. Entrepreneurs willing to navigate the evolving regulatory landscape and adopt innovative business models will be well-positioned to capitalize on emerging opportunities in this industry. By staying informed and proactive, entrepreneurs can not only thrive in the current market but also help shape the future of the psychedelic sector.