Bernstein says reclassifying cannabis as Schedule III not preferred outcome (NASDAQ:TLRY)

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Bernstein said in a note that a reclassification of cannabis by the US government from a Schedule I to a less risky Schedule III drug is not the preferred outcome for many cannabis producers and investors.

While the classification would loosen some restrictions on cannabis sales, a Schedule III designation would still mean it was a controlled substance. The designation would also mean cannabis would be viewed more as a medical product and could prevent it from being treated as consumer packaged goods, which would limit its addressable market, the investment bank said.

“Many cannabis producers, investors and consumers would rather have outright de-scheduling, which would allow cannabis to be treated and therefore sold along the lines of alcohol,” the analysts wrote in their note, adding that de-scheduling could also allow for looser marketing and branding regulation.

The bank noted that the reported HHS recommendation that cannabis be reclassified as a Schedule III substance was not a final recommendation by the DEA to the US Attorney General.

Despite still being considered a controlled substance, Bernstein said that reclassifying cannabis as a Schedule III drug could resolve one headache for US multi-state operators, Section 280E of the federal tax code.

Section 280E prohibits businesses from taking certain deductions if they are associated with the sale or distribution of Schedule I substances.

Bernstein also noted that a reclassification would probably leave many legal questions about the drug unanswered, such as how state laws would be impacted and whether cannabis would only be available by prescription.