This is a law review article showing how these footnotes supposed to be. Not Normal Footnotes please.

Since the 1970’s, American law and policy have greatly progressed due to the changing societal needs, specifically with regard to cannabis use. Although the Federal government has remained somewhat consistent with the Treaty since its enactment with regard to cannabis, the 50 states had a different view of the Treaty. Since the enactment of the CSA in 1970, medical research technology advanced at an unprecedented rate. Specifically, medical research into cannabis, its extracts, tinctures and oils, has led to 33 states plus D.C. to allow for the medical-use of cannabis. In 2012, Colorado and Washington became the first states in the U.S. to legalize the recreational-use of cannabis, in its entirety, completely in conflict with Federal law that prohibits such use. Since 2012, eight more states amended or enacted new laws to allow for the recreational use of cannabis, for a total of ten states. While states continue to legalize the recreational use of cannabis, newer studies and technologies are evolving which are creating newer forms of cannabis medicines that may be able to treat a wider range of diseases, cancers, and disorders. Further, scientific research into the cannabis plant utilizing newer technology has been able to yield more than one hundred different cannabinoids, or chemicals, deriving from the plant, that all may treat different illnesses. As a result of research and the introduction of such forms of cannabis, the cannabis sector flourished as a market of its own but only to be held back by the conflicting international, federal, and state laws.

The Federal Government has lost and is losing a great amount of money due to the forgoing of the collection of taxes within the cannabis industry, which is caused, mostly, by the conflict of federal and State laws. In the U.S., the cannabis industry has become a sector in and of itself with an estimated equity market capitalization of over $25 billion in 2018 (1). Since 2014, the total sales of cannabis have grown at approximately 30% per year, totaling to about $9 billion in sales in 2017. (1). In California for example, a state tax of 15% is imposed on all cannabis sales, plus mandatory city and county taxes, which bring the average sales tax at about 24%, while a similar mechanism is used for other recreational states such as Colorado and Oregon. At $9 billion in sales, total tax revenue would equal to a little over $2 billion to the states while the federal government has received nothing. While the Federal Government is dealing with a growing federal budget deficit, the collection of taxes from cannabis-based businesses will certainly create one way of reducing the spending deficit, and the federal debt as a whole.

The private sector has been greatly harmed in that commerce regulations and financial laws prohibit the deposit of any money derived from cannabis sales into banks. Banks that are backed by the Federal Deposit Insurance Corporation (FDIC), which insures the banks and depositors up to $250,000 in economic crises, are prohibited to accept money from any person or entity that derives the money from cannabis-based businesses. (2). Further, the private sector is being curtailed in that mergers and acquisitions within the industry, which are fundamental to any sector, have been prohibited in cases where State laws are at odds with each other. For example, an investment company based out of Idaho may not be able to acquire a highly-profitable cannabis company in California because the laws of Idaho do not allow such a move. The Securities and Exchange Commission (“SEC”) may also have an issue with an American company looking to acquire a Canadian company because the Federal Government may not allow such taxes to be collected as a result of such merger. Although many issues with the financial laws may not have been litigated in the U.S. courts, yet, they are apparent in the practice and will inevitably have to be dealt with if this Federal prohibition continues. It is now apparent that the only solution to this dilemma is that Federal law, within the CSA and financial laws, is amended to allow for the cannabis industry to prosper as it should have.

HOW DID WE GET HERE?

In 1961, 186 countries, including the United States, signed the Single Convention on Narcotics Drugs (“the Treaty”). At its core, the Treaty is an agreement between the participant States to prohibit the Federal production and supply of a list of agreed upon “narcotic drugs” except for scientific research or medical purposes. Among the drugs listed are hydrocodone, methadone, heroin, and cannabis (including cannabis extracts, tinctures, and oils). (3) Following the Convention, the U.S. ratified the treaty and began looking into creating a domestic enforcement-arm of the treaty, as is required by most, if not all, international agreements. In 1970, Congress passed the Controlled Substance Act (“CSA”) which, inter alia, provided for the domestic enforcement of the treaty by extending the Federal Drug Administration’s duties, and also created the Drug Enforcement Agency (“DEA”) which was to begin scheduling drugs in order to further regulate and essentially comply with the Treaty.(4). The CSA became a popular piece of legislation in the U.S., but the piece of the Act that called for the prohibition of cannabis has since turned out to be problematic not just for the U.S., but for other signatories of the Treaty as well.

Several states in the U.S., and other State signatories of the treaty have since quasi-violated the treaty with regard to cannabis. Not all signatories have complied with the Treaty, leading to a somewhat adverse view of an international treaty’s binding-power as a whole, which has been a major issue since the inception of international law post World War Two. On December 10th, 2013, Uruguay, a signatory of the Treaty, took an unprecedented action when their Senate passed legislation that allowed for the legalized production, sale and consumption of cannabis for non-medical purposes. (5). In October 2018, Canada, also a signatory of the Treaty, became the second country to violate the Treaty by passing federal legislation to allow for the recreational use of cannabis. Two weeks later, the Supreme Court of Mexico ruled that a federal law banning the recreational use of cannabis was unconstitutional under the Constitution of Mexico. Although Mexico has yet to create a law similar to Uruguay and Canada, many legislators have said that legislation will be introduced to their legislative bodies in the coming months for consideration and a highly-possible vote. (6). Many of the State signatories of the Treaty other than those that have already legalized cannabis use are also growing interest in doing the same for themselves, which will inevitably lead to an even greater concern that future treaties will not be abided by. This dynamic has created uncertainty not only within the international law sphere, but has spilled-over onto the U.S. market, curtailing private investment by creating a distinct risk factor; uncertainty of law, both internationally and domestically.

STATE GROWTH

In 2012, the Colorado electorate voted to amend the Colorado Constitution to allow for the recreational sale and personal use of marijuana, including its concentrates, tinctures and oils; the vote passed. (7). Under the new section of the Constitution, the purpose of the law was for the enhancement of revenue, and the efficient use of law enforcement resources. The purpose is as follow:

In the interest of the efficient use of law enforcement resources, enhancing revenue for public purposes, and individual freedom, the people of the state of Colorado find and declare that the use of marijuana should be legal for persons twenty‐one years of age or older and taxed in a manner similar to alcohol.

Colo. Cons. Art. 18, Sec. 16 (1) (a).

After the amendment to the Colorado Constitution, new sales of recreational marijuana in Colorado began in 2014, which generated a whopping $67,594,323 in total tax revenue for the state in the first year. The following year, tax revenues nearly doubled to $130,411,173 in 2015, and continued to grow. In 2016, tax revenue rose to $193,604,810, and last year, in 2017, saw a total of $247,368,473 in tax revenue for Colorado. (8). Without a doubt, these numbers signify an organic growth of the marijuana industry, but at numbers not seen since the days of Standard Oil or the “Dot-Com” boom. At a total of $1.5 billion in total marijuana sales in 2017, marijuana revenue generated more economic activity than 90% of all other industries in Colorado. (8).

Retail stores in Colorado also showed to be a proven success, with over 95% of retail marijuana stores remaining in business, creating a lucrative and sustainable business model for investors (8). In 2014, the state of Colorado issued 322 licenses for retail stores within the state, mostly in Denver. (9). The 322 licenses prompted many business experts and academics to project an overflow of supply, and many of them projected that the oversupply would dilute the sector as a whole, leading to a major shutdown of stores the following years. Not only were they wrong, but almost every single licensed store that opened remained open, and the number of active licenses within the state grew from 322 to 424 in 2015. In 2016, the number grew to 459, and in 2017, the number continued to grow to 509. At the same time, retail stores saw an unnatural increase in their cost of rent, with some landlords demanding an almost 50% increase in rent simply because the business is a marijuana retail store. (10). Not only was the marijuana industry growing, but the industry grew at a rate not seen in any sector since oil or the internet.

At the same time that Colorado legalized recreational sales of marijuana, Washington was doing the same thing in its own legislature. In 2012, the Washington State legislature passed Initiate 502 (I-502) which essentially decriminalized the sale and use of marijuana, while allows for the licensing and regulation of new marijuana businesses. I-502 was popular among Washingtonians due to the agriculture sector that dominates most of the state, and allowed farmers that were otherwise suffering from lack of business in the winter, to continue working year-round. (11). Further, fierce competition among farmers in Washington meant that profits decreased to near null. Marijuana growing became a new business within the agriculture sector, and allowed growers to shy away from the fierce competition surrounding the growth of fruit such as Apples, and moved toward a more profitable business.

Tax revenue in Washington state, similar to that of Colorado, exploded for the state since its introduction in 2014. In 2014, Washington state recorded approximately $16 million in marijuana tax revenue, prompting many critics to question as to its credibility. The following year however saw a massive and unexpected growth of revenue to about $129 million. In 2016, $256 million, and $314 million in 2017. This equals to $742 million in total marijuana tax revenue for Washington State in four years. (13). Although some of this tax revenue derives from recreational retail stores, the majority of this tax revenue comes from the booming farming industry. Washington has seen some of the highest rates of profitability with the tax revenues that have been recorded. Although tax revenues may not be an accurate depiction of the inner-workings and finances of a given industry, they are telling of the overall health and growth of a sector.

Washington State has seen a growth in the cultivation of cannabis almost double the rate of retail dispensaries. (12). Washington is mostly suburban to rural in its geography, and most of the cities in the state are much less populated than bigger states such as California or Texas. It is not difficult to see why not many retail dispensary stores are needed, but the number of producers of cannabis seem to double in number than retail. In 2017, the state of Washington reported 1,009 licenses were issued to producers, while 507 were issued to retail licenses. (13). The industry in Washington seems to be centered in on the cultivation, where profitability in retail stores may not yield as high of a return as it would in cultivation. Further, as we will see later on in this research, retail stores in any state face great barriers in banking and management laws, which also adds to the decrease in profitability. Washington is also known for its agricultural sector, and the popularity surrounding its main export; apples. With the growing number of apple producers in the U.S. and with the growing increase in produce imports, cannabis cultivation has been a profitable alternative to farming fruits. Washington has a $49 billion agricultural industry, which employs about 140,000; one of the highest in the country. The state also sees 13% of its economy coming from agriculture, which places the state, and any other similar state, in a great position to shift its operations to farming new and more profitable crops such as cannabis. (14). Although much cannabis is cultivated as marijuana, hemp may also be grown to assist with the demand for paper products, oils and non-toxic diesel fuel. The growing numbers of Washington’s cannabis sector show that the industry is growing, but continues to face many hurdles that curtail its organic spur.

While Colorado and Washington state were seeing massive tax revenue due to the newly formed industry, every other state in the U.S., and other countries such as Canada and Mexico were watching closely as the newly formed cannabis market began its inception. With a fear that marijuana legalization would prompt things like an increase in crime, deaths, and loss of jobs, quite the contrary occurred. However, the biggest risk was still that, on its face, the State laws were completely at odds with federal law. Although the tax revenue figures in Colorado and Washington showed that, inherently, the marijuana sector was extremely prosperous, the sector was still significantly curtailed. By 2015, retail stores were literally collecting millions of dollars in sales, and paying millions back in taxes, wholly in cash. Further, direct individual and corporate investment from out-of-state investors was reaching an alarming demand rate, but was being curtailed by the uncertainty of governing law. Investors were afraid to invest in this new sector with the fear that they might be in violation of federal law, which until now, does not recognize such recreational or medical sales to occur. Innovation of marijuana products continued to spur, creating new forms of cannabis such as concentrates, vapes, oils, and tinctures. Although Colorado was doing a lot of research into new forms of cannabis, the cannabis industry took a turn, for the better, when it found a new home for research and development.

CALIFORNIA

On November 8, 2016, the California electorate voted to pass Proposition 64 by a vote of 57% which legalized the cultivation, distribution and sale of cannabis within the state. (16). California began legal sales of recreational cannabis on January 1st, 2018 and many had projected that total tax revenues were to exceed $1 billion for 2018.(15). In San Diego, the Center for Medicinal Cannabis Research, which was created in 2000, was further funded by Proposition 64 to continue its research and development of cannabis. The mission of the Center is to “facilitate high quality scientific studies intended to ascertain the safety and efficacy of cannabis and cannabinoid products and examine alternative forms of administration.”(17). In a departure from the private-sector-led industries in Colorado and Washington, California funded its own state-funded center to handle research and development for the sector. This centralized and state-run center symbolized California’s handling of the sector, and has since provided the state with studies, statistics, and scientific information to lawmakers and policymakers to better assist with the growth of the industry. California encountered several roadblocks and hinderances to the sector, for several reasons, but has seen tax revenue hit over $100 million since its inception. Although far lower than the $1 billion than was expected, California’s private-sector blamed much of the lack of anticipated growth on administrative hurdles such as obtaining licenses and the rules governing businesses, which all stem out of the uncertainty of compliance with federal and state law.

In 1996, California lawmakers, frustrated with the Governor’s veto of all efforts to pass legislation for medically-prescribed marijuana, took the issue directly to the voters utilizing Proposition 215. (18). The Proposition called for the allowing of licensed physicians to prescribe cannabis to treat an exhaustive list of specific disorders and illnesses. Some of these illnesses include cancer, AIDS, chronic pain, headaches and glaucoma. Intentionally or not, this Proposition paved the way for medical cannabis in California. As a result of the proposition, over 200 new cannabis caregivers were created, which led to a surge of job growth within the industry. (18). Although tax revenues for the medical industry are not easily accessible through public records for this period of time, it is without a doubt that California’s 15% excise tax on all medical marijuana sales created some additional revenue and job creation for the state.

Proposition 215 was just the first step in the medical marijuana industry creation in California, but the law became famously confusing, leading to many courts to interpret the Proposition in different ways. In 2003, lawmakers and business owners grew increasingly frustrated with the wording of Proposition 215, and deemed the vagueness to be a curtailing of the growth of the industry. Lawmakers took to the California Senate to clarify the conditions, administrative requirements, and amount that a medical patient was entitled to purchase. With those concerns, lawmakers introduced, and eventually passed Senate Bill 420. The Senate Bill 420 did several things for California’s medical cannabis industry. First, it clarified many terms of the law in order to avoid the many arrests and prosecution of caregivers that were simply confused as to what is allowed and what was against the law. Second, the law called for a “uniform and consistent” application of the law within every county of the big state of California. Third, it created a controversial mandate upon all counties of the state to issue identification cards for all caregivers and patients of medical marijuana. Finally, the intent of the new law called for the addressing of “additional issues” of the law that may have arose after the enactment of Proposition 215. (19). Many took the meaning of the “additional issues” as a means of seeking out recreational cannabis, which eventually would pass several years later.

With a few hurdles pertaining to amount limits and the mandatory identification system, the medical cannabis program of California was a financial success for the state. By 2011, the California Department of Public Health wound up issuing over 57,000 marijuana “cards,” although some studies showed the estimated actual number is in excess of 1 million patients. (20). Also by 2011, the number of registered caregivers skyrocketed from several dozen to a little less than 6,000. San Francisco County, where the movement of Proposition 215 initially arose out of, saw the highest number of state-registered patients at close to 20,000. (20). With these figures, it is obvious that the medical cannabis industry in California was not just the biggest in the nation, but was seen as a model for other states to consider. Other states, seeing the popularity of California’s medical marijuana program, and the potential to create an additional source of tax revenue, followed in their footsteps.

California has also been at the forefront of cannabis-product innovation, branding, and marketing. As the nations entertainment capital, Los Angeles is home to some of the biggest television and advertising companies in the world. Although research is limited, or may not even exist, California has led the industry in branding and marketing. Utilizing social media platforms, magazines, and films, the cannabis industry in California has innovated itself and has recreated the image of cannabis in its entirety. One of the biggest, if not the biggest, retail marijuana dispensaries “MedMen” was started in Los Angeles several years ago. The company essentially leads the industry in marketing, choosing a modern/contemporary style in its advertising. The company has been seeking to create a brand that looks and feels like Apple with its simplicity and high quality. (21). Medmen is a unique company that controls everything from cultivation, to curing, to retailing marijuana in 13 states, recreational or medical. In West Hollywood, Los Angeles, MedMen has a prime presence in the area and has priority over billboard placement over, arguably, any other cannabis company located in Los Angeles. A visit to a retail store will show any interested person that the store is indeed “the Apple of cannabis.” (21).

California’s cannabis market is continuing its growth at an unprecedented rate, even with the turbulence of the first year. The state currently has over 40 million people, which includes 1 million medical marijuana patients, that make up its sector, and is estimated to grow in the next ten years. The California market, at this point, represents almost one-third of the U.S. cannabis industry. Although California missed estimates of $1 billion in sales in its first year, analysts estimate that even with the legal and financial hurdles the sector faces as a whole, the California market should reach sales in excess of $5 billion by the end of 2019. (22). Despite the current hurdles in the market today, the California market is an example of the cannabis industry’s growth in America.

THE FEDERAL POSITION

After California’s success in implementing a medical marijuana program, and seeing what Colorado and Washington had done with regard to recreational programs, nearly a dozen states have since followed in the footsteps. As of the date of this paper, the following states have passed legislation to allow for the creation of recreational marijuana programs: Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington, and Washington D.C. Although unofficial, states such as New York and Florida, with medical programs already in place, have floated the idea implementing recreation programs as early as 2019. As the marijuana industry is being opened up in newer states, and with current state markets expanding at an unprecedented rate in business, the entire industry is booming. However, the industry continues to suffer from the conflict of laws among state and Federal law, and Federal law conflicting with international agreements. These conflicts of laws, among other circumstances, have created barriers to investment in this industry, and is significantly hindering the organic growth of the sector.

Conflicting laws create significant risks to investors, personal or corporations, which directly lead to a decrease of otherwise available capital. Absent clear and concise laws, such as the medical marijuana laws of California prior to Senate Bill 420, the chances of litigation and possible sanctions create liabilities for investments, and prompts fear which increases volatility. The federal Government has not issued any sort of “green-light” towards the current states with recreational marijuana programs, and has been silent on the medical programs as well. The primary guidance that the Federal government relies on with regard to questions of cannabis legality is the 1961 Single Convention on Narcotic Drugs Treaty. The Treaty is the first step of unpacking the Federal government’s position on this issue.

The Single Convention on Narcotics Drugs Treaty prohibited the signatories from manufacturing and distributing of any form of cannabis. As a result of the signed treaty, Congress enacted the Controlled Substance Act, which is somewhat a federal law enforcing the international agreement and which schedules the same listed drugs as those in the Treaty. Since 1961, cannabis has remained on the list of drugs listed in the original Treaty. Uruguay and Canada, both signatories of the Treaty, have since clearly and directly violated the Treaty by passing federal laws allowing for the sale and distribution of cannabis. In looking at those countries, the U.S., possibly concerned with violating the Treaty, has since seen the majority of states passing laws creating medical and recreational marijuana programs. With the uncertainty of how, and if the Federal government will crackdown on these businesses that are in clear violation of federal law, financial investment into the start-up, marketing, branding, and production of cannabis businesses have been significantly curtailed. The text of the Controlled Substance Act in the U.S. pertaining to marijuana is as follows:

The term "marihuana" means all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin. Such term does not include the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination.

21 USC 802

The Federal law makes clear that any possession of “marihuana” will lead to a felony drug offense. The term “felony drug offense” means an offense that is punishable by imprisonment for more than one year under any law of the United States or of a State or foreign country that prohibits or restricts conduct relating to narcotic drugs, marihuana, anabolic steroids, or depressant or stimulant substances. 802 at 44. The language of this provision of the CSA is tantamount to investors and capital-holders in the U.S. that are seeking to invest in the industry. It is difficult to pitch to investors the idea of investing in a business that, while legal under an inferior state law, the superior federal prohibits such acts. Although some investors, such as we have seen in Colorado and California, have chosen to take the risk with the hopes that the benefits will outweigh the risk, the majority of businesses in cannabis today are private individuals or newly-formed entities, with only four companies that have a market capitalization of over $1 billion. Compare that with other industries that have most investing companies at over $1 billion in market capitalization, and it is evident that the companies associated with cannabis are simply high-risk takers.

Another reason as to why capital is very limited in the cannabis sector is the access to traditional banking. Traditionally, new businesses that comply with deposit regulations, such as those prohibiting businesses to deposit money from illegal sources, were allowed to utilize a bank’s services. Of importance are the services pertaining to mass-depositing of cash, the writing and issuing of checks, pay-roll, wire-transfers, and certified check issuance for the maintenance or acquisition of new assets or property. In fear that banks would be in clear violation of the Federal Deposit Insurance Corporation (FDIC), almost every single major banking institution has refused to deal with cannabis companies. The FDIC prohibits banks from receiving and investing deposits from entities or individuals engaged in money-laundering services. Under Federal law, money-laundering is a crime committed by “whoever, knowing that property involved in a financial transaction represents the proceeds of some form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity.”(23). Since the cultivation, possession, and sale of any amount of marijuana is “unlawful activity” under federal law, §1956 implicates any bank that assists in the business of such, even if they are simply depositing the money.

As a result of bank’s refusing to accept cannabis money from businesses, that are otherwise permitted to conduct such activities under State law, banks have lost, and are currently losing the opportunity to deposit tens of billions of dollars of corporate revenues. In 2017, the cannabis industry drew in over $9 billion in revenue, which are simply estimates. It is almost impossible to verify the total number of revenue when an entire sector is engaged in a cash-only transaction system, but using the numbers we have now, banks are foregoing on over $1 billion of revenue per year. According to the Federal Financial Institutions Examination Council, in 2018, banks averaged about 12% return on deposits and equity that were acquired from legitimate and federally-allowed businesses. (24). At $9 billion, which is set to increase by over 30% per year for the next few years, banks have directly lost approximately $1.08 billion in revenue in 2018. Although banks receive hundreds of billions of dollars in deposits annually, the loss of revenue is primarily due to the federal regulations prohibiting the receiving of the money.

Without a doubt, tax breaks and abatements effect venture-capital and investment with regard to traditional business. For example, the developer of Trump Tower was able to secure a 421-A tax abatement prior to building it, which abates all taxes for a certain period of time, allowing those tax costs to offset profits. Other businesses utilize tax abatements and breaks for the same reason, however cannabis companies are simply unable to take advantage of the same tax breaks. A cannabis company that seeks to invest in similar prime-property in an expensive city like New York City (if state law allowed such business) may not be able to operate simply because of the high cost of taxes. Tax abatements and breaks to cannabis companies would spur growth and allow more capital to flow into the industry, thus leading to an explosive effect of profitability.

Other than tax-breaks, corporate tax write-offs are also another hinderance on the growth of the industry as a whole. Even though cannabis retail stores average between six and seven-figures in total revenue every year, the costs of licensing, product, marketing, and wages drive down profitability, which leads to higher prices to the consumer. The Internal Revenue Code section 280E does not allow the deduction of typical and necessary business expenses paid in connection with the sale of controlled substances. Section 280E has been one of the main sections of the code that has since become one of the main red-flags for any business owner or investing entity that is seeking to enter the industry.

Due to the fact that cannabis businesses are not allowed to utilize traditional banking for their finances, accepting and holding massive amounts of cash has created difficulties within the industry and has created another liability to business owners. According to an analysis conducted by the city of Denver, more than a quarter of retail dispensaries generate annual revenues in excess of $1 million. (25). In addition, about 15 percent of retail dispensaries report annual revenues between in excess of $500,000. Further, retail dispensaries in popular cities with recurring customers report annual revenues in excess of $10 million, all in cold-hard cash.

Despite the federal government’s evident absence in enforcing federal drug laws that prohibit the sale and distribution of marijuana, the Department of Justice has acknowledged that the drug laws remain intact regardless of state law, but acknowledged the growing sector. In the first government document of its kind, the DOJ addressed the growing number of states that have passed or plan on passing laws permitting the medical or recreation sale and distribution of marijuana. On August 29, 2013, James Cole, the Deputy Attorney General under President Barack Obama issued a memorandum, now known as the “Cole Memo,” addressed to all United States Attorneys with regard to the confusion regarding marijuana enforcement. (26). As many states were passing laws to allow for the medical sale of marijuana, and a growing popularity among recreational states, US Attorneys were sort of confused as to whether they should prosecute such private business or not. The memorandum specifically acknowledged the CSA and Congress’ intention with regard to marijuana; the complete prohibition on the sale and use of marijuana weather for medical or recreational use. In addition, the memorandum addressed the priorities that were “particularly important” to the federal government. Of these priorities were: the prevention of distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises (gangs and cartels), preventing state-authorized marijuana activity from being used as a cover or pretext for trafficking of other illegal drugs, preventing drugged driving and exacerbation of adverse public health consequences associated with marijuana use, preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands, and most importantly, preventing marijuana possession or use on federal property. (26)

The “Cole Memo” became very important as to clarify the federal government’s position with regard to the growing number of states that have been enacting laws to allow for the marijuana industry to prosper. Taken as a “feel-good” document, experts and industry leaders took the memo as a call to sort of restrain the federal prosecution of local marijuana businesses operating under state laws, but more importantly, laid out the importance of federal drug prosecution. Nathaniel Gurien, the head of the Cannabis Banking Financial Network, the largest association of its kind, characterized the memo as “a ‘feel-good’ U.S. Dept of Justice guidance that does not actually restrain local U.S. A.G.s from enforcement but sets department priorities with regard to marijuana, e.g., sales to minors or diversion of product out of state.” The memo gained great popularity among the heads of the largest cannabis companies, and investors, and basically set out President Obama’s policy towards marijuana legalization. Following the memo, eight states including California moved to implement laws allowing for the recreational use of marijuana. In addition, fifteen states have since approved measures or enacted laws to allow for the medical sale of marijuana, contingent upon the approval of a doctor’s recommendation. Although different states has different ways of bringing about such laws, either through ballots, senate bills or propositions, it seems as if the majority of those states were simply waiting for the federal guidance on such programs.

As a result of the Cole Memo, the industry saw an increase of over 50% of states that allowed medical marijuana to reach their ballots. Without a doubt, the it is fair to conclude that many states were simply hesitant to bring any sort of legal measure to their senate floors due to the worry that such measures would be violative of federal law. The Cole Memo served as the green light that many states were seeking from the feds, leading to the further flourishing of the industry as a whole. The Cole Memo’s effects were felt across the nation as many states began implementing laws that allowed new investors and entities to begin investing in their state, creating a wealth of job creation and tax revenue to the states. In California, tens of thousands of new jobs were created as a result of legalization, from growing operations to retail dispensaries. Although the Cole Memo did not specifically call for the full allowing of marijuana laws, and certainly did not call for a halt to the prosecution of individuals conducting business pursuant to state law, the memo certainly relaxed much of the tensions that investors were concerned about. Thousands of new licenses that were not already in place were issued among the various states, and the amount of business capital that was put into commerce, which otherwise would not have been there, flooded the industry, creating new jobs from cultivation to retail. The Cole Memo is the perfect example of how the market reacts to deregulation, or in this case the allowing of regulation, in the cannabis sector.

JEFF SESSIONS CHANGES THE GAME

Although the Cole Memo was more of a hands-off approach, the new Attorney General Jeff Sessions decided that he was going to take a different approach as to marijuana legalization. On January 4th, 2018, then Attorney General Jeff Sessions wrote a memo of his, explicitly rescinding the Cole Memo, an opposite direction. In the memo, Sessions argues that Congress has spoken on the issue of marijuana when it implemented the Controlled Substance Act, and that it was proper to continue prosecuting marijuana cases regardless of state law. (27). In the most direct rebuke to the growing marijuana industry, Sessions went against the Cole Memo and created deep fear among investors and the industry. Acknowledging that the federal government has finite resources, and admitting that the government was not able to prosecute all such cases, the “Sessions Memo” did not intend to direct U.S. Attorneys to have a “hands-off” approach as directed by the previous administration.

The Sessions memo directly rescinded the Cole Memo, which may have been a direct impact upon the already flourishing marijuana industry, specifically in California where total sales for 2018 missed estimated. The Sessions Memo described the previous memo and federal approach as “unnecessary and is rescinded, effective immediately.” Further, the Sessions Memo is self-described as “intended solely as a guide to the exercise of investigative and prosecutorial discretion in accordance with all applicable laws, regulations, and appropriations. It is not intended to, does not, and may not be relied upon to create any right, substantive or procedural, enforceable at law by any party in any matter civil or criminal.” (Cite Sessions Memo). The Sessions Memo was the polar opposite of the Cole Memo, and the media began calling the approach as a “war on legalization.”(28). Unpopular in the media, the Sessions Memo called for the curtailing of the industry and the prosecution of any person or entity engaged in the cultivation, distribution, sale or use of marijuana, medical or recreational.

As expected, the Sessions Memo drew fierce criticism from the cannabis sector, including from other attorneys. One attorney, Michael Weiner, a partner at law firm Dorsey & Whitney LLP. said “right now, we don’t see any big changes for the existing industry. I have concerns that it’ll slow down new investment from new investors who are not currently in the industry.” (28). Although he did not predict that the industry would collapse or close its doors due to this memo, he certainly predicted that the industry would further be curtailed, yet again, by federal action. Lawmakers across the U.S. that were looking at states that had already legalized the recreational use or marijuana, started to look away from the federal government due to the lack of prosecution that was evident. However, the Sessions Memo had a chilling effect on that way of thinking, and forced lawmakers back to the early days of legalization. (29).

Although it is difficult to look at statistics to decide what occurred in the financial market, the stocks of the biggest cannabis companies that were publicly-traded fell by 15%-30% on the day the Sessions Memo was released. “The immediate impact of Attorney General Sessions’ decision to rescind the Cole Memo will be felt most acutely in the public markets, where some companies have already lost 30 percent or more of their stock value since the announcement was made this morning,” stated a statistics company CEO. In fact, cannabis stocks did decrease sharply in the early days of 2018, however, an FDA approval of a Cannabinoid (CBD) drug was the approved later on in 2018, causing even greater confusion among the states.

CBD AND CALLS TO RESCHEDULE

Undoubtedly, the cannabis sector was further curtailed by the Sessions Memo that reiterated the federal government’s power and role to prosecute drug-violations under federal law. The Sessions Memo highlighted an issue that was beyond the simple legalization by the states, and began calling for the rescheduling of cannabis as a whole. The rescheduling of cannabis movement began as early as 1972, when the Controlled Substance Act was created. At the time, proponents argued that cannabis does not meet the criteria laid out by congress as to warrant a schedule I placement, and thus the federal government is required to not only remove it from that schedule, but to specifically allow cannabis to be prescribed for medical purposes. As a rebuke, the government argued that cannabis does indeed meet the schedule I criteria, and is “dangerous” to society, children, and may lead to addictive effects. Ever since 1972, the industry saw a long and difficult road ahead, but that it would be worth it simply because they viewed cannabis in a different light than the officials in charge, and they interpreted the Act in an opposite way.

The Controlled Substance Act, scheduling cannabis and other listed drugs, also allows for a mechanism to reschedule controlled substances. The mechanism calls for the petitioning of the DEA, most likely having to get FDA approval first. In accordance with this mechanism, future generations would be able to conduct more research on a specific drug, and if future technology or scientific research would warrant a descheduling of a drug, then they may be able to petition the DEA for rescheduling, and even descheduling:

The Attorney General shall apply the provisions of this subchapter to the controlled substances listed in the schedules established by section 812 of this title and to any other drug or other substance added to such schedules under this subchapter. Except as provided in subsections (d) and (e) of this section, the Attorney General may by rule—

(1) add to such a schedule or transfer between such schedules any drug or other substance if he—

(A) finds that such drug or other substance has a potential for abuse, and

(B) makes with respect to such drug or other substance the findings prescribed by subsection (b) of section 812 of this title for the schedule in which such drug is to be placed; or

(2) remove any drug or other substance from the schedules if he finds that the drug or other substance does not meet the requirements for inclusion in any schedule.

21 U.S.C. §811

The mechanism begins with a DEA evaluation of all applications or petitions, and must pass DEA muster. Although the DEA receives and answers petitions on the regular, rescheduling is often one of the most difficult things to do, as it acts like an amendment to the law. Cannabis has arguably been the most debated drug in the CSA, and as one may predict, a petition to reschedule cannabis may not be a simply walk in the park. After the DEA receives and a petition to reschedule, it sends a request to the Department of Health and Human Services for an evaluation, and recommendation of cannabis. Although this may seem to be simply of advisory nature, the request from the HHS Secreatry is otherwise binding on the DEA. If the Secreatry of HHS deems that the requested drug analysis is warranted to continue being scheduled, then the DEA may not disagree or appeal such a decision. In other words, the Secretary of the HHS may, at his or her own discretion, call for the legalization of cannabis simply with his or her own recommendation. The Attorney General at the time may not intervene or deny the HHS recommendation pursuant to §811.

Absent the Secretary of HHS’s recommendation, and absent any international treaty that requires the scheduling of a certain drug, §811 calls for the alternative approach to descheduling through the Attorney General themselves. §811 lays out eight factors that any Attorney General must consider prior to the rescheduling or descheduling of a drug:

(1) Its actual or relative potential for abuse.

(2) Scientific evidence of its pharmacological effect, if known.

(3) The state of current scientific knowledge regarding the drug or other substance.

(4) Its history and current pattern of abuse.

(5) The scope, duration, and significance of abuse.

(6) What, if any, risk there is to the public health.

(7) Its psychic or physiological dependence liability.

(8) Whether the substance is an immediate precursor of a substance already controlled under this subchapter.

However, since Cannabis is specifically banned under an international treaty, this mechanism may not, on its face, work to allow for the unilateral rescheduling of cannabis by a sitting Attorney General. The 1961 Treaty called for the mandatory ban on cannabis and all of its properties. Since the treaty has been ratified, §811 mandates that the Attorney General is required to "issue an order controlling such drug under the schedule he deems most appropriate to carry out such obligations" regardless of scientific or medical studies. Congress specifically wanted to give great deference to its agencies, and may have been concerned that Congress’s determinations may become a tool of political will, thus allowing an Attorney General, at their own discretion, to remove scheduled drugs at will.

The Treaty however, does not call for the complete and unfettered ban on any of the drugs. Instead, the Treaty has a mechanism for allowing States to deviate from the Treaty, but only in very limited circumstances. Article 4 of the Treaty foresaw that a drug that is determined to be dangerous now, may in the future yield different results pending any clinical studies and technological advancements (as we have seen with cannabis). The Treaty allows that certain drugs may be used for “medicinal and scientific purposes” and if those drugs may be found to be beneficial to the public, the Treaty has a mechanism to allow for such advancements. Thus, a state signatory may produce, manufacture, export, import, distribute, trade, use and possess cannabis for the limited purpose of scientific or medical research. (3). Since the U.S. does not have any State-run clinical administration agency, such as many European and Latin American countries, the Treaty may allow the private-run clinical or scientific studies by government permission, while being funded privately. This Article may have been paramount to the creation of the Center for Medicinal Cannabis Research in San Diego, which operated under State money pursuant to the Proposition.

Although cannabis has encountered many legal battles over descheduling and legalization, one of cannabis’ properties has recently been favored among governmental agencies. Cannabidiol, or as referred to as “CBD,” is a property of hemp, a child of the cannabis plant, and has recently become popular in the media and in society. CBD has almost no traces of delta-9-tetrahydrocannibinol, or THC, the main ingredient found in marijuana which is responsible for the “high” effect after being consumed. The cannabis plant yield two sub-plants: hemp and marijuana. CBD is derived solely from hemp, while THC is derived from marijuana. (30). CBD is the second most prevalent of the active ingredients of cannabis, THC being the first. While cannabis has over one hundred properties, THC and CBD have recently become popular among consumers, thus leading to a greater inflow of capital. At its November 2017 meeting, the World Health Organization Expert Committee on Drug Dependence (ECDD) concluded that, in its pure state, CBD does not appear to have abuse potential or cause harm. The Committee concluded that CBD is not currently a scheduled substance in its own right (only as a component of cannabis extracts), and thus “current information does not justify a change in this scheduling position and does not justify scheduling of the substance.” (31).

Six months after the WHO issued the first conclusion that CBD should not be scheduled in the many countries, and that a clarification is warranted between CBD and THC, the FDA took up the question of Epidolex. Epidolex is manufactured by GW Pharmaceuticals, and is used for the treatment of two seizures associated with rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. The drug is entirely made of CBD and has been tested successful as that. Although CBD has been used to treat more than just these two illnesses, it was a first step to take for CBD descheduling. The FDA, through its own analysis, approved the drug to treat such illnesses and passed its recommendation to the DEA that it should be a schedule 5 drug. The DEA has since done so.

The FDA did not just approve Epidolex, the first CBD based drug to be scheduled, but also included a note about the marijuana plant as a whole. The FDA Commisioner Scott Gottlieb, M.D., remarked that the “approval [of Epidolex] serves as a reminder that advancing sound development programs that properly evaluate active ingredients contained in marijuana can lead to important medical therapies. And, the FDA is committed to this kind of careful scientific research and drug development.” (32). The FDA has in essence, officially stood behind the research and development efforts of cannabis after seeing the majority of states push towards the medical and recreation legalization of it. The DEA stands on its own now as it continues to argue that cannabis is well-deserved to be in the schedule I category, pursuant to further petitions and research.

As a result of Epidolex’s passing, cannabis stocks from the NYSE to Toronto surged over 20%, yet the continued federal and legal barriers that curtail the industry are still evident.[footnoteRef:1] Another company, Tilray, a Canadian cannabis company which focuses on cultivation and distribution, saw its stock sky-rocket earlier in 2018 due to several factors. Tilray was the first cannabis company to go public in an initial public offering, or IPO, on a U.S. stock exchange. The introduction of Tilray became crucial for Wall Street investors who were seeking on entering the cannabis market for years, if not decades. The stock surged over 1000% in 2018 because the company became the first to be approved by the DEA to import cannabis to the U.S. specifically for medical research. This became the first of its own, as every effort to import cannabis, either from Canada or Mexico, has been denied by the DEA or FDA. The FDA and DEA, acting in pursuant to the CSA, has until now, seen no justification in allowing any entitiy to import a scheduled drug into the U.S. for medical reasons. Perhaps the DEA has finally seen the markets in states where it has since then become legal, and seen that the dangers that Congress has been concerned about are simply not evident. Regardless of its reasoning, it was a crucial first step at legalization. [1: The North American Marijuana Index rose about 35% from Epidolex’s FDA approval in June 2018, to October 2018. The drop after October 2018 was most likely due to the general market conditions, rather than reasons of the cannabis industry. ]

CONCLUSION

The cannabis sector in America has flourished from an underground business, to one of the highest-performing industries, regardless of the federal laws that prohibit such industry. Over the past several decades, the majority of states have passed and enacted laws to allow for the cultivation, distribution, use and sale of cannabis, all while federal law has not been swayed by such movements. The industry has grown from local farmers and dealers, to nationwide and even global companies that are engaged with the commercial cultivation and sale of cannabis. The industry is flourishing with research and development from states like Colorado to California. In California alone, over 30,000 people are employed in the sector, ranging from farmers to retail workers. Virtually every single business engaged in the cannabis sector has remained in business or has expanded its operations among several states. With all of this growth, the sector is extremely premature in nature and continues to fight against almost every single bureaucratic and administrative legal hurdles.

International treaties that were created and enacted over fifty years ago remain in tact, and prohibit the cultivation, distribution, sale and use of cannabis, in all of its forms. The Controlled Substance Act still has cannabis as a schedule I drug, alongside heroin and cocaine. Federal banking laws prohibit the great majority of capital to flow into the industry, and virtually and figuratively ban all banks from engaging with cannabis businesses. Until today, cannabis businesses rely on a cash-only operation, even if transactions to purchase and sell certain property exceed millions of dollars. The real dangers are currently being caused by such laws calling for the transport and use of millions, even billions in cash, while virtually zero deaths have occurred from the use of the drug. Financial laws have also prohibited many companies from seeking loans from banks that may allow for the growth or acquisition of the biggest companies in the industry.

Tax revenues have surged in states that have implemented laws that legalize cannabis, such as California and Washington. In those states alone, tax revenues have nearly doubled, and except to be tripled, even with the current conflict of laws and uncertainty surrounding the legal sphere of cannabis. Even with all that is holding back this industry, cannabis has proved to be a financial, medical, and social success among the states and nations that have went against international treaties, and federal laws that prohibit the sale of cannabis. The industry continues to grow at an unprecedented rate. International organizations such as the World Health Organization have called for the continued research and development of cannabis drugs. Federal officials and high-level actors of the U.S. Department of Justice have inadvertently called for the allowing the cannabis industry to flourish, while those that oppose such policy have done so in the name of politics. The industry has been moving quickly in the direction of legalization, and it is expected that cannabis, regardless of the great barriers it faces, will flourish as one of the most successful business stories of all-time.