Stock exchanges not likely to budge under Schedule III

While many things likely will change if cannabis is rescheduled from a Schedule I drug to Schedule III under the Controlled Substances Act, the stance of the top stock exchanges in the U.S. probably won’t be one of them.

Speculation has run rampant that rescheduling could open up the New York Stock Exchange and the Nasdaq marketplace to domestic cannabis companies under such a change. But at least one expert says, not so fast.

Why the where matters

Currently, most American-based cannabis companies can only trade on the Over-the-Counter, or OTC, Markets in the U.S. due to cannabis being federally illegal. As a result, they often turn to Canadian exchanges like the Canadian Securities Exchange (CSE) or the Toronto Stock Exchange (TSX).

The drawback to being listed on the OTC Markets is that many institutional investors won’t invest in OTC-listed companies. This limits the market for these stocks. Similarly, the Canadian exchanges are much smaller than the U.S. markets, which limits the financial benefits.

Slow the roll

Ride-or-die cannabis investors have been hoping to get the stocks uplisted to the NYSE or Nasdaq based on rescheduling – but that might be wishful thinking.

Neither the NYSE nor the Nasdaq would comment on whether they would open up to cannabis stocks upon rescheduling. And according to Nasdaq’s published rules and regulations for listings, many cannabis operators in the U.S. would still be tagged with federally illegal operations despite rescheduling, which would keep them ineligible for listing.

“Schedule III, even when final, will not lead the New York Stock Exchange or Nasdaq to list U.S. plant-touching companies. Those companies will continue to be violating the Controlled Substance Act,” Eric Berlin, a partner at the legal firm Dentons told Green Market Report.

“Instead of selling an illegal controlled substance illegally, they will be selling a legal controlled substance illegally. And the problem is that none (of those products) will have the required DEA registrations,” he added. “And the DEA has said that it does not intend to give any registrations or to register any party that is simultaneously violating federal law.”

Berlin noted that the exchanges probably have to power to lean on banks to clear the stocks if it wanted the listings, but the risk outweighs the reward. An updated Cole Memo would also be insufficient to give them comfort. Under former President Donald Trump, Attorney General Jeff Sessions rolled back gains by the Obama administration around cannabis. If Trump is reelected, it could happen again.

Stocks on the rise

Investors, though, seem unbothered by this pesky detail, and the price of cannabis stock shares has popped.

The AdvisorShares Pure US Cannabis ETF was selling at roughly $7.36 before the news of rescheduling broke; it popped to a 52-week high of $11.36 just after. It was lately selling at $9.21, which is still up 25% from the pre-announcement price.

Berlin believes the rising stock valuations are warranted as the tax benefits to cannabis companies will be substantial under Schedule III. However, uplisting is much further in the distance.

“I think that this is an area that they are waiting for greater congressional action,” he said. “And the fact is that I don’t think Schedule III gives them the legal path forward, quite frankly.”