E160 - 4/30 is the new 4/20! What we know about Schedule 3

[00:00:00] Welcome to the High Rise podcast presented by Headset, the leading data and analytics company for the cannabis industry.

[00:00:09] Welcome back to the High Rise, a laid-back, data-back conversation where we talk all things cannabis from US MSOs to products and market analysis through the lens of data.

[00:00:19] My name is Sy Scott, CEO of Headset, and I'm joined as always by managing partner of the side in Emily Paxia.

[00:00:27] Hi everyone, welcome to the High Rise.

[00:00:30] Welcome back Emily. I know we're a bit spotty this year, but I think it's maybe a byproduct of just everything going on.

[00:00:41] I know we're busy over here. I'm sure you're busy over there.

[00:00:44] And lots to talk about today, but here we are recording. It's May already, which is pretty insane.

[00:00:52] But that also means that we've had a 420, 420, 2024, which is great.

[00:01:00] And so I wanted to kind of shout out, yeah, Headset has some good data. You may have seen it out there.

[00:01:06] We've published a number of insights, but I do encourage everyone to take a look.

[00:01:11] It's pretty easy to find on our website. It's headset.io slash 420, 420.

[00:01:18] What I'll say about it is everyone sees the top headlines like, oh, the biggest 420 ever.

[00:01:26] There are more transactions than ever. But I do think that it's quite nuanced and you really need to kind of dig in and see what does that mean?

[00:01:34] And one thing I think it means is a lot of the growth isn't coming from some of these legacy markets.

[00:01:40] Even when we compared 420 this year, which was on a Saturday and we rolled in Friday under the assumption of a lot of people are buying into the week, going into the weekend, planning ahead.

[00:01:53] And certainly they were. But we compared that to two days last year, which I think was like Wednesday, Thursday.

[00:01:59] And even some markets like California down versus last year.

[00:02:02] So you're looking at, you know, Wednesday, Thursday sales down a bit versus, you know, Friday, Saturday sales in markets like California, but other markets did really well.

[00:02:13] So it really varies and, you know, we talk about it all the time, all the nuance, all the different pricing pressures and different markets and discounting strategies, you name it.

[00:02:22] But I thought it's a good report. So encourage everyone to take a look. Pretty easy to digest and we've got a cool visual this year showing you where all the transactions are happening, you know, from the moment the first 420 sales happen across the U.S.

[00:02:36] And these are all headset connections. So this is all real data coming through as they happen. It's like every 15 minutes you'll see the graphic updates every 15 minutes in a compressed timeline.

[00:02:48] You don't have to, you know, sit there for 12 hours watching every transaction. But take a look headset.io 420 another one in the books we're going to do even more next year always always fascinating to see the data and it's always changing.

[00:03:05] But I don't want to talk about this for 20 I want to talk about the new 420 right.

[00:03:11] Oh, do you mean 430 2024?

[00:03:15] The new 420 I love it. I love it 430. Yeah, what a big day. You know, we're recording this on Wednesday, May 1. So yesterday, the headline came out, you know, everyone was expecting some news on 420 I think and we didn't get it.

[00:03:34] Somewhat surprised, somewhat absolutely not surprised as we've dealt with but yeah the new 420 is 430 with the announcement that it sounds like it's official that schedule 3 is coming.

[00:03:48] A lot of hoops to jump through before we get there and that's what I want to talk to you about because you, I think more than anybody out there seem to be more connected to this even though there's some sorts of speculation.

[00:04:01] You've had a lot of opportunity to talk to some groups that are pretty close to this so where do you want to start?

[00:04:07] Yeah, so I guess it's really interesting because I woke up yesterday morning and I realized it was the last day of April and I thought, okay, well we didn't get scheduling updates in in April and so by all political accounts we probably won't hear anything until the fall and was kind of preparing for a hibernation on federal reform through the cold winter of San Francisco but

[00:04:32] you know it was interesting because then all of a sudden Morgan and I were on an intake call and the AP news flashed across his screen and so

[00:04:40] AP was the first to leak it that this in fact the DEA was going to move ahead with recommending schedule 3 which is, I think we should just pause and acknowledge that.

[00:04:50] I mean the DEA has spent the majority of quote-unquote its life enforcing cannabis as a schedule one narcotic and we know the origins of that are really messed up but this is an actual significant shift.

[00:05:07] Now whatever happens next in the process around this is going to be interesting because by all accounts it sounds like this is an unprecedented experience we're about to have in cannabis.

[00:05:21] So you know my number one thing as an investor is always to try to obtain as much knowledge as I can about something like there's real risk and then there's perceived risk and the edge when you're thinking about allocating capital is to kind of to get the edge of it.

[00:05:37] And then you can get the edge on that and get the information and understand the delta between real versus perceived in this instance it's to understand the real impact of something, the market impact of something and and the process around it so we can get involved.

[00:05:53] So I think because more and more for example your company has data that could be useful to when talking to different people who maybe key stakeholders involved in this process.

[00:06:04] Essentially what I've learned and this is through multiple conversations with different organizations is that you know now we're going into this rulemaking period where we're going to see how this is actually implemented.

[00:06:16] It's likely that will take 60 days plus and it is also likely that then it will get challenged by our friends at Sam as we've said the death rattle of prohibition is loud and it is likely it'll get challenged and then it'll go into an endgame.

[00:06:34] So I think that's a really good question.

[00:06:36] So I'm going to go ahead and get into this process of an administrative process.

[00:06:41] So I'm actually going to get a chance to hear from some lawyers I think next week about what the process of an administrative process is and I've been asking if there are any analog cases that we could look at that really draw a comparison to what we're about to experience and the short answer is no.

[00:06:54] It's a pretty significant step and I think everybody should just seriously take us take a step back and look at this as a truly monumental shift in the US and and therefore internationally around what it means to have cannabis in the world.

[00:07:09] Yeah, I mean it is insane that it takes one president you know in the 70s one one stroke of a pen to put on schedule one and it takes God knows how many agencies how much time how many opportunities for public comment to just you know and then now yeah potentially cases to get it unwound.

[00:07:39] It's crazy but you're right we're here and it's happening and you know it's like one of those things that you know kind of new is new is going to happen eventually right at some point the whole country is going to have legal cannabis and federal government's going to have to do something.

[00:07:55] But it's great to see and it's it's you know you see that it's going to be official here.

[00:08:02] It is funny like the online discourse you know yesterday, nothing but just like celebration and today nothing but like, it's going to be a year or oh you don't even know what schedule three means it's going to be worse for cannabis it's like all these takes right it's just like we can't just have a nice.

[00:08:22] Nice, nice moment to just like yeah look this is happening and this is a completely unprecedented.

[00:08:30] And yeah we're just going to we're just going to write it like we've written this industry the whole time right like all the ups and downs in between so there's going to be probably a winding road here is what you're saying before.

[00:08:44] It's all said and done and then when it's all said and done more winding roads like what does it actually mean as far as implementing but I think yeah we should all.

[00:08:52] It certainly feels more positive than negative, even though yeah some of the tenor out there is a little like you know, I don't know it's kind of predictable kind of tiring like I kind of bailed out is like looking to them like I don't even want to read this stuff because everyone's just being goofy.

[00:09:11] It is a I mean when I see that I go back to my psychology background and I'm just like oh this is what trauma looks like in real time.

[00:09:21] Total trauma.

[00:09:24] It's total everyone just like can't can't feel good for a second because we're going to get we're gonna get burned again.

[00:09:29] I was like almost walking down the street kicking stones last night thinking about that Smith song like the good times for a change please please please you know right.

[00:09:39] Oh man, I like don't I can't get comfortable but you know I actually do feel like I tried to let this sink in because I think if you don't take the winds as they come then all the body blows just feel devastating so yeah that's a good way to put it so hopefully all our listeners are feeling the same.

[00:09:58] We're giving you a hug.

[00:09:59] Yeah, that's right.

[00:10:00] We all share this trauma together.

[00:10:02] Yes, there's collective trauma but um you know I think and by the way like so we have a process so we have a process for once.

[00:10:10] To me honestly to like it was in a black box while it was in the DEA's hands.

[00:10:15] I mean there's no penetrating that black box and the fact that the AP got the leak that they did means that it was intentional by the DEA they wanted to preview that and it showed well and and here we are and yeah

[00:10:27] and the stocks ripped and then today they boomeranged back down but which also is predictable.

[00:10:32] You sell the news right there's probably a lot of people that are ready to go.

[00:10:36] They were like get me out but you know that's fine we got to wash through those we got to wash through that cycle and then you know people will be coming in and looking at this sector differently.

[00:10:47] So what is so you know it's interesting some of the things I've learned today about what it means is like you know I had a phone call with the exchanges.

[00:10:55] They are super interested in working with cannabis companies which is good for companies like yours as you you know get to certain points and actually like you would probably be able to list at some point because of the way headset is and the way and like their bright line rules around revenue and all these things.

[00:11:14] Yeah but on an operating company standpoint you know scheduling a loan and everybody should have known this but it's the reality and we checked in today and and it does mean that they will not be immediately allowing for uplifting or does this change custody for public companies.

[00:11:31] But the view that I heard that was very different today is you know for a while they were like we'll even wait and see it could be well over another year before the DEA makes this call.

[00:11:42] So the fact that the DEA made the call was actually very monumental and it does potentially set up for the other necessary steps to get listing or to get banking.

[00:11:54] So so while scheduling alone doesn't do that and while scheduling alone doesn't change the criminality around cannabis and in the view of the federal government.

[00:12:04] It does it represents an important and significant acknowledgement around where cannabis lives which you know when it was at schedule one that basically to reduce it down to nothing it means that cannabis has no positive potential benefits.

[00:12:21] And so living at schedule three it's an acknowledgement that it does have potential positive benefits and that's that's really important.

[00:12:29] So so that was one of the things that we learned today.

[00:12:35] Yeah did you have any questions about the capital market thing or is that pretty straightforward.

[00:12:40] I think it's straightforward.

[00:12:41] I'm sure yeah it seems like it's kind of been the speculation anyways I'm sure they've been talking about what does schedule three mean if it when the rumors started happening.

[00:12:50] You mentioned like it could it starts some processes that maybe get us there.

[00:12:56] Are those things complicated.

[00:12:59] Are they like a maybe or more or more likely to happen now it's schedule three.

[00:13:06] Right well it does kind of take the opposition the wind out of the opposition sales around why cannabis shouldn't be recognized more so there's some feeling that.

[00:13:17] Banking reform this may pave a smoother path I'm going to reserve incredible judgment on that but it does kind of say well the people who are opposed to it don't really even have now a good scientific or even by the eyes of the DEA a good standard to hold against this so why shouldn't we enjoy the same you know banking privileges as other industries

[00:13:44] and and frankly thereby put us in a better system for you know KYC AML through the existing banking infrastructure which is what Rob Nichols from the ABA is always arguing for so.

[00:13:57] So that would be one thing if especially if it calls out specific commercial banking support and or capital markets so the other thing could of course be memo from Merrick Garland kind of putting back in place the call memo.

[00:14:13] Challenges with that of course involve we don't know what happens with a new president and with a new DOJ if if the election should move away from Biden so that does create maybe a short term solution which would then be contemplated but we are going to stay in touch with the council for the exchanges

[00:14:33] and try to get very clear now the feeling was now that schedule three from the DEA is is been proposed.

[00:14:42] We can start talking concretely about next steps.

[00:14:46] The other thing that they did articulate that sounds important is the Commerce Clause case which does basically put it that the federal government would you know recognize legal regulated operators functioning within an interest state infrastructure so things like that that

[00:15:06] indicate that the federal government will not be going against companies that are following the rules within state lines are other things that could be helpful so there are a couple of those.

[00:15:17] So that's important but but I don't think we should say okay so rescheduling is happening and so therefore but it didn't really do anything know it did something because it gave a very strong foundation to build all these other points on.

[00:15:33] And I wanted to ask you about the Commerce Clause case since you're so involved in what does does this have an impact as it accelerate does it give anything like any ammunition to.

[00:15:46] The arguments that that will be made.

[00:15:51] Yeah it does because part of the points of the case that we have an oral arguments on May 22nd in Springfield, Massachusetts I'm actually going to attend which I'm really excited to hear David Boy's argue on behalf of the industry but.

[00:16:04] Basically part of the case is arguments is that the government has not been consistent under the CSA in terms of the way it has approached cannabis and.

[00:16:15] And this kind of proves that the CSA and the way cannabis has lived within it has not been valid to your point it was a stroke of a pen it wasn't a well researched and documented process that put it on schedule one, it was a political move and frankly a racist one.

[00:16:32] And so now we've had to go through all this extensive work to pull it into schedule three and that work still continues but that's that does really kind of support the theme of this case which is that the CSA has not been.

[00:16:47] Fairly applied and cannabis has been functioning very differently from like cocaine or, or even the fentanyl issue that our country faces which is derived from a legal market and of course then into an illicit market.

[00:17:04] Yeah, and that's interesting reminds me of what happened in New York recently when they threw out all the regulations.

[00:17:13] And put them back in for a minute but wasn't that kind of the argument that the judge made based on you know what leafly was arguing around the marketing restrictions and saying well it looks like all these rules are pretty arbitrarily defined.

[00:17:29] And so we're just going to throw out all of the rules which for half a day it looked like New York just had no structure except for you had to be 21 to purchase cannabis there's like I think they left that in but everything else licensing criteria everything else was out the window for a minute.

[00:17:47] I know some of our friends at the show were pretty busy trying to like juggle what does that mean in New York for a minute but it does remind me what you're saying about, you know the argument.

[00:17:59] This is the CSA and like oh it's just all kind of arbitrary in the end so kind of moving it to schedule three.

[00:18:07] I know that so you're saying it kind of helps with some of that just.

[00:18:12] Yeah, pointing out that the way it has been treated has been kind of arbitrary and inconsistent not well supported and that there is in fact evidence pointing to the fact that it for other things and so it limit going to schedule three is basically opening the window and saying it's not what had been the arbitrarily assigned around cannabis as being this terrible product and.

[00:18:35] Right and the HHS yeah with all their findings and stuff that came out that where they unredacted everything and you can kind of see that stuff so that's got to help to right because that very helpful that is evidence yeah.

[00:18:48] Very help I mean it's all it's all just supporting and even so much so is I mean even the comparison they draw to alcohol almost saying alcohol is more concerning and problematic in society from every level versus cannabis which is which is a pretty strong statement and then you have the AMA I mean it's just amazing.

[00:19:07] The scientific bodies that are coming out in support of this but I mean it's I'm glad you raised New York State because we know these issues are kind of popping up to in terms of the way the federal governments.

[00:19:19] Interfer you know one of the things that do J said about that case was that they're not interfering with interest rate commerce well then we just got this whole thing in New Mexico and I had a phone call with one of the operators this morning to hear about how this is being handled.

[00:19:33] And just back to you know schedule three is a stepping stone and it was it was acknowledged actually by the border patrol in the groups that have been giving these guys the hard time in seizing their products in Mexico New Mexico and saying.

[00:19:47] This doesn't protect you from our new program where we're seizing all the product that we get our hands on within this place.

[00:19:55] And so basically what we're finding out is that there are three checkpoints on northbound highways within New Mexico where product companies are going to deliver their products to retailers.

[00:20:07] And they're getting intercepted and their products are being seized and they're not allowed to get them back and this all just started on February 14th there's no clarity on why and then it's gotten so bad that the.

[00:20:19] Sheriff of the town has gotten is becoming spoken outspoken about it and the local jurisdictions are also filing for an injunction against the federal government about this.

[00:20:31] So these things are happening and like while the scheduling is really really important it's not providing any kind of protection in those instances so we just have to keep pushing on all these other fronts but like I said this foundation is incredible as a stepping stone.

[00:20:45] Yeah yeah and I know the governor of New Mexico recently came out and wasn't there like a recording that got yeah that got leaked about this like oh they make so much money who cares which.

[00:20:59] Yeah I think the governor was pretty upset when when they heard that and like you know pushing back against this stuff I'll find that that headline and link to it.

[00:21:09] But it does seem like all this stuff is kind of coming together right at this right moment and I know the the Commerce Clause case that you guys are pushing.

[00:21:21] You mentioned May 22nd is like the first time that this is going to be argued.

[00:21:28] Yeah that's that's great but it's also part of a longer process right this is the beginning of maybe something that's going to take a little while.

[00:21:36] Yeah that isn't that is a process for sure and yeah we're hopeful that steps along the way for that will give fodder to other efforts like in the legislative branch or with a memo you know just the steps around that and the acknowledgement by the courts or even if they

[00:21:56] you know maybe don't want to move the case forward but they write a strong opinion like there's a there's a number of ways that this works so it's it's usually it's helpful and I think it's helpful in just alongside all of these other efforts like the work that we will be doing now through the rulemaking process through the administrative hearing process on schedule

[00:22:18] three the work that's going on in the legislative this is now the time to be pushing on this but yeah it's important.

[00:22:28] Well it certainly feels like the time I mean with with this news on the new 420 or 430 as we call it happening this case coming together.

[00:22:40] Yeah it does feel like now is the time so yeah even with all of our our traumas I think it's okay to be a little optimistic here.

[00:22:48] That's right.