Cannabis and Coronavirus: Examining the Pre- and Post-Pandemic Regulatory Landscape
While public attention has focused on how the coronavirus is affecting cannabis businesses from the perspective of supply and demand, there is an equally important force receiving less attention: the regulatory framework for cannabis.
May 26, 2020 at 05:02 PM
9 minute read
While public attention has focused on how the coronavirus is affecting cannabis businesses from the perspective of supply and demand, there is an equally important force receiving less attention: the regulatory framework for cannabis. Until now, the industry has operated against the backdrop of the state-federal conflict with the potential of several important developments—such as the promise of forthcoming CBD guidance from the FDA and federal legalization—on the horizon for 2020. The spread of the coronavirus has necessarily shifted legislative focus while also reviving dialogue about legalization through a new lens. This article explores how the coronavirus-related disruption to cannabis regulatory efforts will impact cannabis businesses over the short and long term and what we can expect to see on the cannabis regulatory front for the remainder of 2020.
Pre-Pandemic Landscape. At the beginning of 2020, there were over 900 cannabis-related bills pending in state legislatures and Congress, and industry observers anticipated considerable developments in the cannabis regulatory framework throughout the year. By early March, the FDA had issued a much-awaited report summarizing its efforts to craft a regulatory scheme to address the burgeoning CBD marketplace. Discussions regarding the stalled Secure and Fair Enforcement Banking Act (SAFE Banking Act) were slowly reviving. Many of these measures came to a screeching halt as the coronavirus took hold in March 2020. Even so, a look at where the regulatory landscape stands amidst the pandemic reveals that, while there has been some expected shift in focus as the country concentrates on pandemic-related issues, cannabis–related legislation and concerns have not been entirely cast aside. With the pandemic's economic concerns looming, cannabis-related legislation is being examined from a new angle: as a potential positive economic disruptor.
Federal Legalization. The pandemic has highlighted the incongruence of the federal-state cannabis regulatory landscape in stark relief: as the virus took hold, cannabis, while remaining illegal on the federal level, was declared an essential service under closure orders in many states with legal medical marijuana programs. Unexpectedly, the question of federal legalization has also been revived in the context of coronavirus relief legislation. The CARES Act, the key piece of coronavirus economic relief legislation, provides relief through SBA loans and programs, for which cannabis businesses and their ancillary service providers are mostly ineligible. This has prompted industry groups and lawmakers alike to plead for some economic relief for cannabis companies. Following the passage of the CARES Act in late March, a consortium of industry groups called upon Congress to allow state-legal cannabis businesses to be eligible for SBA emergency loans. In mid-April, a bipartisan group of lawmakers wrote to House leaders urging that the next round of coronavirus-related stimulus legislation include state-legal cannabis businesses. Whether such measures will be included in the next stimulus package are unclear. There is at least one bill pending in the House, H.R. 3540, the Ensuring Safe Capital Access for all Small Business Act of 2019, which may factor into that calculus. The bill proposes removing cannabis from the schedule of controlled substances and prohibiting the SBA from rendering cannabis businesses or ancillary service providers ineligible for emergency assistance. On May 12, House Democrats unveiled a $3 trillion package of coronavirus relief in the Health and Economic Recovery Omnibus Emergency Solutions, or HEROES Act, which includes some economic relief for the cannabis industry. Whether the HEROES Act will become law remains to be seen, but these lobbying and legislative efforts have meaningfully revived the dialogue surrounding legalization, albeit in a new context. Cannabis legalization at the federal level has long been characterized by a piecemeal approach, beginning with the Ogden and Cole memos, FinCEN guidance and the subsequent rescission of the former. We can expect this incremental approach to continue, this time through the vehicle of coronavirus-relief legislation and ensuing developments. While full-scale federal legalization is unlikely to occur in the short term, incremental measures such as these, designed to afford state-legal cannabis emergency relief, are likely to pave the eventual path to federal legalization.
Banking and Financial Services. In September 2019, the SAFE Banking Act passed the U.S. House of Representatives but stalled in the Senate Banking Committee. The SAFE Banking Act, if passed, would provide a safe harbor to banks and other financial institutions for doing business with cannabis companies by removing the threat of criminal prosecution for those institutions, their employees, officers and directors. In January 2020, immediately before the pandemic began, the bill's sponsors wrote to Senate leaders outlining shared goals as the bill was considered in the Senate. The exchange signaled meaningful movement toward passage of the SAFE Banking Act, which appeared stagnant as the pandemic hit the United States. While there seemed little hope of reviving the dialogue around the industry's much-needed access to financial services, as noted, the stimulus efforts raised an important issue for cannabis companies that have resulted in renewed interest in the bill. Reviving the SAFE Banking Act may change the equation by allowing cannabis businesses to freely access the banking system. In recent weeks, both the bill's sponsor and industry advocates have raised proposing a revised version of the SAFE Banking Act as part of the next round of stimulus legislation as a path forward for providing the industry access to financial services. On May 8, several industry groups sent a letter to House leadership, highlighting that continuing to exclude the cannabis industry from meaningful financial services threatens public health. Because cannabis businesses are forced to handle cash, they are subject to increased risk of robbery and violence. This reliance on cash also renders cannabis businesses particularly vulnerable to the coronavirus, which can live on cash for up to 17 days, according to a recent report. Because circulating banknotes from consumers and patients to business and then government poses considerable risk of spreading the virus, the letter requested that the SAFE Banking Act or similar language be included in the next round of relief legislation. These efforts appear to have had an impact. One provision of the HEROES Act, pending in the House, would provide protections for banks that provide services to state-legal cannabis businesses and other ancillary-service providers similar to the stalled SAFE Banking Act, as well as direct banking regulators to produce an annual report toward expanding women and minority ownership of cannabis businesses. The introduction of this language appears to have stemmed from the lobbying efforts of marijuana trade groups, exposing how excluding cannabis businesses from financial services threatens public health during the pandemic and reframing the debate around legalization in an unprecedented fashion.
State Legalization. Pre-pandemic, full-scale state legalization efforts were underway in several states, including Connecticut, New Hampshire, New York and Vermont. Numerous other state legislatures were considering bills for medical marijuana programs and various campaigns were diligently working to place cannabis legalization efforts on the November 2020 ballot in states like Missouri. Coronavirus appears to have seriously disrupted those efforts. Primarily, the urgent concerns surrounding coronavirus means cannabis is no longer as important for state lawmakers, who have scrambled to enact vital emergency legislation. In addition, social distancing, remote meetings, and lawmaker illnesses have resulted in a lack of availability and the absence of a meaningful platform to legislate about an issue as complex as cannabis legalization. Unsurprisingly, the pandemic has disrupted the manner in which a legislative body can practically draft, debate, redline, negotiate and pass new laws, especially as an increasing number of lawmakers become infected with coronavirus. In New York, for example, 2020 began with the potential for marijuana legalization, with Gov. Andrew Cuomo including cannabis legalization in the annual budget proposal. But in early March, the virus caused the governor to scrap his previous plans to tour legal marijuana states and learn from their experiences while New York moved ahead on reform. Instead, as New York emerged as one of the states hit hardest by the virus, the issue of cannabis legalization proved too cumbersome and complex for lawmakers to accomplish in time for the passage of the spending bill on April 1. The governor cited the complexity and politically charged nature of the issue as the basis for the abandonment of the initiative in 2020.
Other states have struggled with similar issues as their attention has shifted to COVID-19 concerns, emergency measures and the ensuing economic crisis. Even as stay-at-home orders begin to lift in some states, it seems unlikely that cannabis legalization will be an immediate priority for most states previously considering such measures. As state legislatures grapple with the economic impact of the crisis, managing reopening and resulting budgetary concerns, cannabis legalization is likely to take a backseat. However, once the immediate health and reopening concerns are addressed, it is likely that at least some states will give greater consideration to cannabis legalization as the source of additional economic growth and tax revenue. Most likely, we can expect to see renewed and perhaps more forceful support for these legalization initiatives as coronavirus concerns recede and lawmakers begin to consider post-pandemic economic initiatives.
2020 was poised as a significant year for cannabis, with numerous state legalization initiatives underway. While those efforts have been temporarily slowed by the coronavirus, the post-pandemic world may also represent a meaningful turning point for cannabis legalization efforts. The pandemic has presented an opportunity to view the question of cannabis regulation through an economic lens, shifting the focus away from questions of social stigma and related concerns that often thwart legalization initiatives. The pandemic has also underscored the vital role that state-legal cannabis businesses play in the U.S. economy. As lawmakers and regulators tackle the economic realities in the wake of the pandemic, cannabis-related legislation is slated to be a significant part of the discussion moving forward. Specifically, previously reticent lawmakers may realize that through the right regulatory framework, marijuana legalization and taxation can help shore up empty state coffers and put a dent in historically high unemployment rates.
Meghana D. Shah is a partner at Eversheds Sutherland and has Co-founded and co-leads the Cannabis Industry Team. In that role, she has served as a trusted strategic advisor to a variety of clients, including cannabis companies and ancillary service providers such as insurers and financial services institutions, with respect to a broad range of issues related to cannabis
Melissa Fox is an associate at the firm and is a member of Eversheds Sutherland's Cannabis Industry team, Melissa counsels a variety of clients on the rapidly changing patchwork of state and federal laws affecting this industry.
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