By Justin Henry May 2, 2024 The American Lawyer
The likelihood of marijuana’s federal reclassification to Schedule III status has Big Law leaders eyeing opportunities to expand relationships with clients who have historically lacked the same tax benefits and bankruptcy protections as other sectors.
Despite the growing number of states legalizing cannabis for recreational and medicinal use, the nascent legal cannabis industry has been hobbled by lack of traditional bank financing and a federal tax code prohibiting expense deductions enjoyed by most other sectors.
While the DEA’s reclassification of marijuana as a Schedule III drug won’t bring state-legal cannabis businesses into federal compliance, it has the potential to infuse the industry with millions in reinvestable capital, resulting in transactional and financing potential, lawyers say. Rescheduling could also provide cannabis clients with protection in the bankruptcy courts, which historically has been a hostile environment for distressed cannabis businesses.
“What makes reclassification a watershed event is that it frees up capital and allows for more growth and allows for potential consolidation and more successful companies, more competition with respect to multistate operators and get back to a place of equity investment,” said litigator Seth Goldberg, co-chair of the cannabis industry group at Duane Morris.
“We have been preparing for that, and lawyers in each of our practice areas—whether IP, corporate, employment—who have cannabis practices are already thinking about how they‘re going to advise clients in the cannabis industry and also outside of the cannabis industry with respect to how reclassification impacts that type of law,” Goldberg said.
Under cannabis’ current Schedule I status, Section 280E of the tax codes prevents businesses from deducting expenses involving the “trafficking” of Schedule I or II substances, restricting the amount of operating capital. […]
The combined impact on cannabis businesses of tax liabilities and lack of access to financing “can’t be overstated,” Goldberg said. Removal of 280E “will have an immediate impact on operator balance sheets,” he said.
“With the operators performing better, they can reinvest in the industry and more folks will invest,” he said. “A firm like Duane Morris will continue to do what it is doing, but now you have cannabis companies with hundreds of thousands of employees, and that raises the same level of labor and employment and union issues that every industry is dealing with. As the cannabis market starts to perform better, our services across our entire platform should be in greater demand.” […]