President Trump intimated that he is on the verge of rescheduling cannabis from a Schedule I drug to a Schedule III drug. This is a promise that President Biden made, but was unable to complete. If this rescheduling happens, it will have massive implications on the profitability of cannabis related companies.

In addition, President Trump’s DEA, FBI, ATF and ICE all continue with hardcore intervention into the illegal drug trade. There have been dozens of drug seizures, hundreds of arrests and a major disruption in the illegal marijuana trade. That can only be good for the legal players.

The Impact Of Rescheduling Cannabis

President Trump’s commitment to address cannabis rescheduling within weeks represents a watershed moment for America’s cannabis industry. The potential reclassification from Schedule I to Schedule III would unleash a cascade of economic benefits across every sector of the cannabis supply chain, from cultivation facilities struggling with 280E tax burdens to equipment companies constrained by their customers’ limited purchasing power.

For growers, the elimination of 280E would provide immediate cash flow relief while enabling investments in advanced cultivation technologies and facility expansion. Distributors and MSOs would gain access to conventional banking services and position themselves for eventual interstate commerce opportunities. Cannabis REITs would benefit from improved tenant creditworthiness and increasing property demand, while equipment and fertilizer companies would experience market expansion driven by their customers’ enhanced financial capacity.

The transformation would extend beyond individual companies to fundamentally reshape the industry’s structure and competitive dynamics. Improved access to capital would accelerate consolidation, creating larger and more efficient operators while providing opportunities for strategic partnerships across the supply chain.

While rescheduling alone wouldn’t constitute full federal legalization, it would remove many of the artificial barriers that have constrained industry growth and innovation. The acknowledgment of cannabis’s medical value and lower risk profile would reduce stigma, encourage institutional investment, and create the foundation for additional federal reforms.

As the cannabis industry awaits Trump’s decision in the coming weeks, stakeholders across all sectors are positioning themselves to capitalize on what could be the most significant regulatory change in the industry’s modern history. The economic benefits of rescheduling—from immediate tax relief to long-term market expansion—would create value for investors while advancing the industry’s evolution toward mainstream acceptance and integration with the broader American economy.

The question no longer seems to be whether federal cannabis reform will occur, but how quickly the industry can adapt to capture the extraordinary opportunities that rescheduling would create. For America’s $45 billion cannabis industry, the next few weeks could mark the beginning of an economic renaissance that transforms a constrained and stigmatized sector into a fully realized component of the nation’s agricultural and business landscape.

The Federal Rescheduling Framework: Understanding the Transformation

Under the current Schedule I classification, cannabis sits alongside heroin and LSD as a substance with “no currently accepted medical use and a high potential for abuse”. This classification creates a complex web of restrictions that permeate every aspect of the cannabis industry, from taxation to banking to research opportunities.

The rescheduling process, initiated by the Biden administration in 2022, has progressed through multiple phases of scientific review. The Department of Health and Human Services recommended reclassification to Schedule III in August 2023, acknowledging cannabis’s medical value and lower abuse potential compared to Schedule I and II substances.

Schedule III Implications

Moving cannabis to Schedule III would place it alongside substances like ketamine, anabolic steroids, and codeine products—drugs recognized as having legitimate medical uses with moderate to low potential for physical and psychological dependence. While this wouldn’t constitute full federal legalization, it would remove many of the barriers that currently constrain industry growth and profitability.

The most immediate impact would be the elimination of Internal Revenue Code Section 280E, which currently prevents cannabis businesses from deducting ordinary business expenses.

Cannabis cultivators would experience the most dramatic transformation from rescheduling, primarily through the elimination of 280E tax restrictions. Currently, growers face effective tax rates of 60-70% because they can only deduct cost of goods sold (COGS) while being prohibited from deducting standard business expenses like rent, utilities, labor, and equipment costs.

The removal of 280E would allow cultivators to deduct normal operating expenses, including facility leases, employee salaries, insurance, marketing, and equipment depreciation. This change could improve gross margins by 30-40% overnight, providing crucial capital for reinvestment in cultivation technology, facility expansion, and product quality improvements.

Operational Efficiency and Scale Economics

Rescheduling would enable growers to invest more aggressively in automation and precision agriculture technologies. With improved cash flow, cultivators could implement advanced environmental controls, LED lighting systems, and automated trimming and packaging equipment that enhance both yield and quality while reducing labor costs.

The economic benefits would be particularly pronounced for indoor cultivation facilities, which currently consume 50-70% of their total energy costs on horticultural lighting. Access to standard business deductions would make energy-efficient LED lighting systems more economically attractive, while federal energy efficiency programs previously unavailable to cannabis businesses could provide additional cost savings.

Expansion and Market Access

Improved profitability would fuel geographic expansion as successful growers seek to establish operations in new markets. The elimination of 280E would make acquisition financing more accessible, as lenders would be able to underwrite loans based on normalized cash flows rather than the artificially depressed earnings created by current tax restrictions.

Additionally, rescheduling could open pathways for organic certification, as current federal organic programs exclude Schedule I substances. This would create premium product opportunities and align with consumer preferences for sustainably produced cannabis.

Research and Development Opportunities

Schedule III status would dramatically expand research opportunities for cultivation techniques, genetic development, and product innovation. Universities and research institutions would face fewer barriers to studying cannabis cultivation, potentially leading to breakthroughs in yield optimization, pest management, and product consistency.

Banking Access and Financial Services

The banking challenges facing cannabis distributors and multistate operators (MSOS) represent one of the industry’s most significant operational barriers. Currently, only 508 banks and 172 credit unions provide services to marijuana businesses, forcing most companies to operate primarily in cash.

While rescheduling alone wouldn’t immediately solve all banking issues, it would substantially reduce the perceived risk for financial institutions. The acknowledgment of cannabis’s medical value and lower risk profile would encourage more banks to enter the market, increasing competition and reducing the premium pricing currently charged for cannabis banking services.

Access to conventional banking would enable MSOs to utilize standard financial instruments including commercial loans, lines of credit, merchant processing, and payroll services. This financial infrastructure is essential for scaling operations efficiently and reducing the security risks and operational costs associated with cash-intensive businesses.

Interstate Commerce Potential

Although rescheduling wouldn’t immediately enable interstate commerce—which would require additional federal legislation—it would create the regulatory foundation for such developments. I often say in webinars that “things that make sense, eventually happen.” I think this falls into that zone.

Several states have already passed laws authorizing interstate cannabis commerce once federal barriers are removed, suggesting rapid market integration following additional federal reforms.

The prospect of interstate commerce would fundamentally alter MSO strategies, potentially enabling companies to optimize production in states with favorable growing conditions and regulatory environments while serving markets nationwide. This could lead to significant cost efficiencies and competitive advantages for well-positioned operators.

Consolidation and Market Expansion

Rescheduling would accelerate the ongoing consolidation trend in the cannabis industry by improving the financial health of acquisition targets and making deals more attractive to buyers. The elimination of 280E would normalise cash flows, making valuation and due diligence processes more straightforward and enabling more aggressive pricing for quality assets.

MSOs with strong balance sheets and operational capabilities would be positioned to acquire distressed competitors at attractive valuations. Or, even more likely in my opinion, private equity firms would take a chance at acquiring legalized cannabis businesses, pumping them with the cash necessary to grow.

In short, the improved profitability from tax relief would provide the cash flow necessary to service acquisition debt and invest in operational improvements.

Capital Market Access

One of the most significant long-term benefits for MSOs would be potential access to major U.S. stock exchanges. While rescheduling alone wouldn’t guarantee immediate uplisting, it would remove a significant barrier and reduce the compliance burden that has prevented most cannabis companies from accessing traditional capital markets.

Access to public equity markets would dramatically expand the investor base available to cannabis companies, potentially including institutional investors like pension funds and mutual funds that are currently prohibited from investing in federally illegal businesses.

Cannabis REITs: Real Estate Demand Surge and Valuation Expansion

Cannabis REITs would benefit enormously from the improved financial health of their tenant base following 280E elimination. Currently, cannabis operators pay artificially high effective tax rates that constrain their ability to pay rent and invest in facility improvements.

The immediate cash flow improvement from tax relief would strengthen tenant credit profiles, reducing default risk and enabling REITs to command higher rents for quality properties. This improvement in tenant quality would be particularly valuable for REITs like Innovative Industrial Properties (IIPR) and NewLake Capital Partners, which have experienced tenant defaults in recent years.

Property Demand and Development Opportunities

Rescheduling would likely trigger increased demand for cannabis cultivation, processing, and retail properties as improved industry economics drive expansion. The combination of better access to capital and improved profitability would enable existing operators to expand their footprints while attracting new entrants to the market.

This increased demand would be particularly pronounced in limited-license states where regulatory scarcity creates premium valuations for compliant properties. REITs with portfolios concentrated in these markets would benefit from both higher occupancy rates and increasing rental rates.

Zoning and Development Flexibility

The reduced federal stigma associated with Schedule III classification could encourage municipalities to reassess restrictive zoning ordinances that currently limit cannabis operations to industrial areas. More flexible zoning could expand the universe of suitable properties and enable cannabis businesses to operate in locations that better serve their customer base.

This zoning evolution would create additional investment opportunities for REITs, particularly in retail properties located in high-traffic areas that are currently off-limits to cannabis businesses due to municipal restrictions.

Valuation Multiple Expansion

Cannabis REITs currently trade at significant discounts to traditional real estate investment trusts due to the regulatory uncertainties and tenant risks associated with the federally illegal status of cannabis. Rescheduling would likely trigger multiple expansion as these risk premiums diminish and institutional investors become more comfortable with cannabis real estate exposure.

Industry estimates suggest that federal rescheduling could unlock $1.2 trillion in economic value by 2030, potentially boosting REIT valuations by 3-5x from current levels. While these projections may be optimistic, the directional impact on valuations would likely be substantial and immediate.

Equipment and Fertilizer Companies: Supply Chain Expansion and Market Growth

Equipment and fertilizer suppliers would experience significant growth as their customer base expands and existing clients increase their purchasing power. The elimination of 280E would free up substantial capital that cultivators could reinvest in advanced growing equipment, environmental controls, and facility upgrades.

Companies like Scotts Miracle-Gro’s Hawthorne Gardening division, which supplies nutrients, lighting, and hydroponic equipment to cannabis growers, would benefit from both increased order volumes and customers’ ability to invest in premium equipment previously constrained by cash flow limitations.

The global hydroponic market, dominated by cannabis cultivation, is projected to exceed $45 billion by 2030, with LED lighting representing a particularly high-growth segment due to energy efficiency advantages. Rescheduling would accelerate adoption of these technologies by improving the economics for cultivators investing in facility upgrades.

LED Lighting and Energy Efficiency

The cannabis cultivation industry’s transition to LED lighting would accelerate significantly following rescheduling. LED systems can reduce electricity consumption by up to 40% compared to traditional high-intensity discharge lighting, but the high upfront costs have limited adoption in an industry constrained by cash flow.

With 280E relief providing additional cash flow, cultivators would be better positioned to make the capital investments required for LED conversions. Additionally, access to federal energy efficiency programs and rebates previously unavailable to cannabis businesses would further improve the economics of these upgrades.

Fertilizer and Nutrient Innovation

The improved research environment associated with Schedule III status would benefit fertilizer and nutrient companies by enabling more sophisticated product development and testing. Universities and research institutions would face fewer barriers to studying cannabis-specific nutrient formulations, potentially leading to more effective and efficient growing media.

Companies could also explore opportunities in organic and sustainable growing products, as rescheduling would make organic certification possible for cannabis cultivation. This would create premium product segments and align with consumer preferences for environmentally responsible cultivation practices.

Supply Chain Integration and Partnerships

Equipment and fertilizer companies would likely pursue deeper integration with major cannabis operators through joint ventures, exclusive supply agreements, and strategic partnerships. Scotts Miracle-Gro’s strategic separation of its cannabis-focused Hawthorne entities positions the company to capitalize on these opportunities once federal reform provides regulatory clarity.

The company has retained options to reacquire divested cannabis assets if federal legalization occurs, suggesting confidence that rescheduling would create significant value in the equipment and supply sector.

Cannabis Industry Growth Projections

The U.S. legal cannabis market is projected to reach $45.3 billion in 2025, with the total economic impact including ancillary businesses reaching $123.6 billion. Rescheduling could accelerate this growth by removing regulatory barriers and improving access to capital, potentially bringing forward projected 2030 market sizes by several years.

Industry employment, currently supporting over 440,000 full-time equivalent jobs, could expand rapidly as improved economics enable business expansion and new market entry. The multiplier effects of increased cannabis business spending would benefit equipment suppliers, real estate developers, professional services firms, and local communities.

Banking and Financial Services Evolution

The passage of the SAFER Banking Act, which has bipartisan support from 32 state attorneys general, would complement rescheduling by providing explicit safe harbor protections for financial institutions serving cannabis businesses. This combination of regulatory changes could rapidly expand banking access and normalize financial services for the industry.

Traditional banks currently approve only 20-25% of conventional business loan applications, suggesting that cannabis businesses shouldn’t expect dramatically higher approval rates even after rescheduling. However, the expansion of the lender universe and reduction in risk premiums would likely improve access to capital and reduce borrowing costs.

Top Cannabis Stocks

I released my top two cannabis stocks earlier this week. Both pay a fat dividend, have great balance sheets, are growing faster than their industries and are likely to take part in strategic transactions. I think both stocks are likely to give a triple in total return the next five years and could do even better if private equity decides to buy these companies.

Author

Kirk Spano 

Founder | Head of Investment Research and Analysis