Recently, United States health regulators proposed that the federal government loosen restrictions on marijuana. Since the cannabis equipment finance space has grown exponentially over the past years, this should come as welcome news to those who are a part of it.

Many of you remember when marijuana was flat-out illegal at the state and federal level. In 1996, California became the first state to legalize it, albeit for medical use only. Almost twenty years later, in 2014, Colorado became the first state to legalize recreational usage.

Today, cannabis is legal to some degree in virtually every state (37 to be precise). As you might have surmised, the rules are different in every state. There are those states which have legalized the medical use only of marijuana and/or Cannabidiol (CBD): Hawaii, New Hampshire, Georgia, Louisiana, Arkansas, Florida, North Dakota, Ohio, Pennsylvania, Iowa, West Virginia, Oklahoma, Utah, Mississippi, Indiana  and South Dakota. Then there are those states which permit the use of marijuana for recreational use as well. These states include California, Alaska, Nevada, Oregon, Wahington, Maine, Colorado, Montana, Vermont, Rhode Island, New Mexico, Michigan, Arizona, New Jersey, Delaware, Connecticut, Massachusetts, Illinois, Maryland, Minnesota, New York. Finally, there are four states in which cannabis remains illegal, including Idaho, Kansas, South Carolina and Wyoming and American Samoa.

The market for cannabis products is projected to reach $146 billion by 2025. This matters to the equipment finance industry because cannabis manufacturing requires money. The equipment is expensive. If you rent a warehouse, the rent can exceed $50,000 a year. Growing equipment may cost upwards of $150,000. Licensing can add another $50,000 or so to your start-up costs. The total cost for a new business could be almost $1,000,000. Similarly, dispensary financing is expensive, particularly for a start-up.

One of the problems initially (and, still) facing the marijuana industry is that marijuana is  illegal under  federal law. While the states presumably change with the times and state legislators (to some degree) follow the will of their constituents rather than their own political agendas, Federal law, to date, has not really changed. Pot is still illegal under federal law. In fact, marijuana is currently listed as a Schedule 1 substance under the Controlled Substance Act (“CSA”) That places it on par with heroin and LSD, with similar attendant consequences and penalties for unlawful possession and/or distribution.

Finally, almost 30 years after California took its giant step forward into the medical marijuana industry, the federal Department of Health and Human Services (“DHHS”) has recently proclaimed that marijuana should no longer be classified in the same category as the concededly more dangerous drugs as heroin and LSD. This is the first time a major government agency has acknowledged the misclassification of cannabis as a dangerous substance. However, pot will remain illegal under federal law, even if it is taken off the Schedule 1 list.

Still, if the DEA were to reschedule cannabis as Schedule III, the impact would be profound. Here are just a few of the potential impacts:

1. The change would most notably eliminate Internal Revenue Code §280(e), intended to prevent drug dealers from claiming tax deductions for business expenses. This has traditionally been one of the major impediments to profitability. Repealing it would be a major boon to the industry.
2. It would undoubtedly re-open the discussions to make it easier for financial institutions to offer banking services to legal cannabis companies. This would deter criminals from targeting cash filled safes.
3. It would make it easier for advertisements in newspapers and magazines to travel across state lines.
4. Rescheduling would widen the field of cannabis research without worry from the scientists, researchers, and medical practitioners who, to date, have been hobbled by the Schedule 1 status.
5. It would clarify the laws and regulations that relate to air travel, including FTC searches, and travel to and from other countries.
6. It would also clarify the laws pertaining to bankruptcy for debtors in the industry. The courts often hold that cannabis-related businesses do not qualify for bankruptcy based on the Controlled Substance Act. That often narrows the remedies available to distressed marijuana businesses to receiverships.
7. It would create better control over illegal production which too often resorts to dangerous and unhealthy pesticides for growth.

Keep in mind that rescheduling is not the same as decriminalizing. There will still be friction between the federal and state governments over rights and remedies of cannabis users and businesses. The proposed changes to the CSA would be a welcome beginning to reconciliation of these differences for those in this business.

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