Denied! Here's What You Need to Know About the DEA's Decision Not to Reclassify Marijuana

Image source: Getty Images.

It was supposed to be the greatest thing to ever happen to the marijuana industry: the rescheduling of marijuana away from its current status as an illicit substance with no recognized medical benefits. Moving marijuana to anything other than Schedule 1 would allow for physicians to prescribe medical marijuana to patients throughout the United States, and it would presumably be the dawn of a new era for the cannabis community.

However, this utopic dream will have to wait for another day.

The DEA declines to reschedule marijuana

After a long analysis of the risks and benefits of medical marijuana by the U.S. Drug Enforcement Agency (DEA), which was supplemented by the recommendation of the Department of Health and Human Services (HHS), the DEA announced on Thursday that it plans to leave the current Schedule 1 status of medical marijuana unchanged, with one small caveat. The agency will relax certain regulations surrounding marijuana research for medical purposes, presumably allowing for more legal grow farms with the expressed purpose of medical marijuana research. There's currently only one approved cannabis grow farm for medical research in the U.S., located in Mississippi.

Based on the recommendation it received from the HHS, as well as its own research into marijuana's medical risks and benefits profile, the DEA chose to keep medical marijuana illegal for three specific reasons, quoted below directly from the DEA:

Image source: Cannabis Culture via Flickr.

This ruling isn't all bad

Now that we have a definitive ruling from the DEA, we can take a closer look at how it'll impact the cannabis community.

While the DEA declining to expand the use of medical marijuana is a blow to supporters, it's not all bad news. In reality, the DEA's decision could wind up being great news for smaller growers, processors, and retail distributors.

If the DEA had rescheduled marijuana to Schedule 2, it would have brought the substance under the tight regulation of the Food and Drug Administration. Though Schedule 2 drugs are recognized as having medical benefits, being categorized as a Schedule 2 substance would have dramatically increased costs for smaller players, potentially pushing them out of business.

For example, the FDA has the final say on packaging and marketing for Schedule 2 substances. It would have also had the ability to tightly control the manufacturing process of medical marijuana, including ensuring that the THC content of one batch to the next remained consistent. But, most important, as a Schedule 2 substance, the FDA could have required marijuana businesses to verify their claims that cannabis provides a medical benefit by having them run costly clinical trials. Most small cannabis businesses would not have been able to absorb these added costs.

It's also possible that keeping medical cannabis as a Schedule 1 drug could be a positive for the consumer when it comes to pricing. If the above presumption is correct -- that costlier regulations would have dramatically narrowed the playing field -- bigger companies with deeper pockets would have eventually dominated the marijuana industry, likely pushing prices higher. The DEA's decision to stand pat could actually be a positive for the consumer by keeping the industry competitive.

Image source: Getty Images.

Inherent disadvantages remain

Of course, the DEA's decision comes with a few bad connotations, too, for both businesses and investors.

The biggest downer is that the two inherent disadvantages the cannabis industry is currently facing are likely to perpetuate. First, businesses that sell marijuana products are unable to take normal business deductions come tax time. This leaves marijuana businesses to pay tax on their gross profit rather than their net profit, reducing income they could have used to expand and hire.

The other issue is that cannabis-based businesses have veritably no access to basic banking solutions, such as a checking account or line of credit. Having to deal solely in cash is a security concern for marijuana businesses, and it can hamper their ability to expand, hire, and buy new product.

The other issue with the DEA's decision is that it does absolutely nothing to help investors that want to take advantage of marijuana's exceptional growth rate. According to cannabis research firm ArcView, cannabis could grow by 30% annually throughout the remainder of the decade. Investors, though, probably won't be able to take advantage of this growth rate since bigger companies won't have a chance to thrive. Most investable options can be found as penny stocks on the over-the-counter exchanges, and finding accurate financial information can prove challenging for OTC penny stocks.

Legal marijuana sales, from both a recreational and medical standpoint, could very well keep growing at a double-digit percentage, fueled by the passage of initiatives and amendments at the state level. But as an investment, marijuana still appears to be off-limits, even for the most risk-tolerant, long-term investors.

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Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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