By Robert A. Mandel, Dr. Jayashree Mitra, and Jonathan M. Purow

Despite the absence of White House support, United States Senate Majority Leader Charles Schumer (D-N.Y.) unveiled on Thursday a preliminary draft of the ambitious Cannabis Administration and Opportunity Act (“CAOA”), which, if enacted, would decriminalize cannabis if cultivated, manufactured, sold, administered, used, and possessed in a regulatory-compliant manner and preserve at least parts of existing state cannabis laws and regulations. The key provisions of the CAOA, which opens a pathway for federal regulation of the cannabis industry, are as follows:

Removing Cannabis from the Federal Controlled Substances Act (“CSA”)

Cannabis (marihuana) with more than 0.3% delta-9 tetrahydrocannabinol (“THC”) is classified as a Schedule I controlled substance in the federal CSA. This classification exposes cannabis businesses, employees, consumers, caregivers, and medical professionals–and all those who “aid and abet” their conduct–to potential criminal prosecution, civil and criminal penalties, and a host of additional adverse legal repercussions. It also severely limits interstate commerce in cannabis and cannabis products in the United States and prohibits the import and export of cannabis from and to other nations. And it significantly impairs scientists’ ability to conduct cannabis-related research.

In contrast, possession, production, and distribution of hemp containing 0.3% THC or less has already been decriminalized under federal law and state law, although its marketing is subject to the regulatory authority of the U.S. Food and Drug Administration (“FDA”).

The proposed legislation would remove cannabis from the CSA. A new definition of “cannabis” would be established within the Food Drug and Cosmetic Act (“FDCA”) while retaining the existing exception for hemp. This provision would also transfer primary agency jurisdiction over cannabis from the Drug Enforcement Administration (“DEA”) to the FDA, the Alcohol and Tobacco Tax and Trade Bureau, and the Bureau of Alcohol, Tobacco, Firearms, and Explosives, as appropriate.

Preserving the Integrity of State Laws

If enacted in its current form, the CAOA would recognize state law as controlling the possession, production, or distribution of cannabis. But it also would enjoin every state from prohibiting the interstate commerce of cannabis transported across its borders for lawful delivery into another state.

Banking and Loans

While the bill does not explicitly mention banking, it would effectively remove potential penalties that banks and financial institutions currently face when servicing cannabis businesses. The CAOA also would provide funding to eligible states and localities to direct towards loans to small businesses in the cannabis industry owned by economically disadvantaged individuals.

Research, Training, and Prevention

Recognizing the need for additional research and data on the safety and efficacy of cannabis use, the proposed legislation would allocate responsibility to various government agencies to evaluate the health and societal impact of cannabis.

This includes directing the Government Accountability Office to evaluate societal metrics that may be impacted by legalization, including deaths and injuries, violent crime rates, employment statistics, rates of cannabis use, and various other criteria. Such data would be supplemented by data collected by the Department of Transportation and the Department of Health and Human Services on the impact of cannabis on driving.

Restorative Justice and Social Equity

Recognizing the disproportionate impact of cannabis-related incarceration in communities of color, the CAOA calls for expungement of federal non-violent cannabis convictions and for resentencing, and it incentivizes states and localities to act similarly. The CAOA would bar adverse effects on immigration and discrimination in the provision of any “federal public benefit.” Aside from the aforementioned loans to certain small businesses, the CAOA would provide grants to create equitable licensing, business, and social support programs.

Taxation and Permissions

The CAOA proposes an excise tax on cannabis products in a manner similar to the tax imposed on alcohol and tobacco. This includes a general rate of tax of 10% per annum for its year of enactment and the following calendar year, with the rate increasing annually to 15%, 20%, and 25% in the subsequent years. Beginning in year five, the tax would be levied on a per-ounce rate for cannabis flower, or a rate determined by milligrams of THC with respect to cannabis extracts.

To assist small businesses, cannabis producers with less than $20 million in annual sales would be eligible for a 50% federal tax reduction via a tax credit. To avoid abuse of this abatement, the tax benefit would apply only to products produced or substantially modified by these small producers.

The CAOA would impose permitting or registration requirements on cannabis businesses depending upon their role in the industry. Wholesale sellers of cannabis products would be required to obtain a permit from the Treasury Department. Sellers of taxable cannabis products would be required to obtain a Treasury Department permit and register for tax purposes. Producers of cannabis products would be required to register with the FDA. The CAOA proposes that a cannabis business would be able to make all three filings on a single, unified application to minimize administrative burden, if applicable.

Cannabis permits may be denied or revoked if: (1) a company’s premises are inadequate to prevent tax evasion or diversion, (2) the operation of the premises do not comply with federal or state law, (3) the applicant fails to disclose material information or makes a false statement, or (4) the applicant is convicted of a felony criminal offense that occurred after enactment of this Act and within the preceding three years.

Regulation by the FDA

The CAOA would grant the FDA primary federal regulatory authority over the manufacture and marketing of cannabis products. The legislation calls for the establishment of a Center for Cannabis Products with the authority to regulate the cannabis aspect of any product, except for those products that make claims regarding the treatment or prevention of disease in humans or animals. Products containing cannabis that make such disease claims would be regulated as drugs by the FDA’s Center for Drug Evaluation and Research or Center for Veterinary Medicine, and would be subject to FDA drug approval requirements.

The Center for Cannabis Products would be responsible for establishing and implementing requirements relating to product listings, good manufacturing practices, product standards, product labeling, and product distribution and recall.

The CAOA removes the prohibition on marketing CBD as a dietary supplement. Dietary supplements containing more than the recommended daily serving set by the FDA would be deemed adulterated. Certain dietary supplements would be required to submit New Dietary Ingredient notifications to the FDA, and the FDA would retain the authority to enforce safety-related labeling or packaging requirements.

Food and cosmetics containing cannabis would continue to be regulated as food and cosmetics by the Center for Food Safety and Applied Nutrition and would also be regulated as cannabis products by the Center for Cannabis Products.

Cannabis Administration and Trade Practices Enforcement

The CAOA proposes restrictions on packaging and labeling intended to prevent non-competitive market behavior, including prohibitions on deceptive labeling, disparagement, and obscenity. Manufacturers would also be required to place identifiers that would enable the tracking of products. The CAOA imposes prohibitions against commercial bribery and uncompetitive trade practices under rules similar to those applicable to alcohol, including the prohibition of: (1) exclusive sale agreements meant to limit market competition, (2) commercial bribery or other monetary inducements meant to limit market competition, and (3) certain non-monetary inducements meant to limit market competition.

Legislative Support and White House Response

While the introduction of the CAOA is a significant step forward towards federal legalization, the likelihood of it becoming law remains cloudy. At the CAOA’s introductory press conference, Schumer candidly admitted that “we don’t have the votes necessary at this point.”

Even if the bill were to pass Congress, it may face opposition from the White House. Within minutes of the CAOA’s introduction, White House Press Secretary Jen Psaki reiterated that the Biden administration remains opposed to legalization and would be more receptive to incremental reform such as decriminalizing possession, expunging criminal records, and respecting the rights of states to set their own laws.

Although the future of the CAOA remains uncertain, the industry can be assured of at least one thing: industry participants must prepare for the possibility of a new regulatory environment, one that will require the devotion of substantially more resources to legal and regulatory compliance.

Legislators have invited stakeholders to submit comments in writing by September 1, 2021 to Cannabis_Reform@finance.senate.gov before this draft legislation is finalized.