COVID-19 has taken a massive toll on many different industries over the past months. But while the true long-term effects are still unknown, it’s possible some businesses may emerge unscathed, and may be even better off by the end of this pandemic. One of those could be the cannabis industry. Despite many industries seeing substantial decreases in sales, and commensurate revenue, amid the COVID-19 crisis, sales of certain products, such as alcohol and cannabis, have actually increased this spring.
As the world emerges with a modified form of normalcy, there remains a large amount of uncertainty to how the cannabis industry may be impacted by this new normal. Buchanan’s cannabis practice, consistently ranked nationally by Chambers, has a coast-to-coast perspective on how cannabis law will evolve. Our experts in cannabis and cannabidiol (CBD) law share what they see as the short- and long-term future of the industry in the aftermath of COVID-19.
With recent increases in cannabis sales, expect new M&A activity in the near future.
While the COVID-19 pandemic has had a positive impact on the cannabis market as it relates to sales and revenue, the industry saw a notable number of larger M&A transactions falter and fail during the height of the pandemic. However, as restrictions loosen and markets begin to recover, many believe that the M&A market in cannabis will again heat up, in light of increasing valuations resulting from the sales booms in many jurisdictions.
Even with the COVID-19-led increases in cannabis sales, the fourth quarter of 2019 and the first quarter of 2020 were unkind to many cannabis companies in the U.S. and Canada who were unable to obtain necessary financing or that were struggling prior to the pandemic, with a handful even seeking controversial bankruptcy relief. While traditionally cannabis companies have been forbidden from U.S. bankruptcy protection because marijuana is still considered a Schedule I controlled substance, even some companies that had been relatively healthy just a few months ago are considering their options. Rather than pursuing traditional Chapter 11 bankruptcy, distressed cannabis companies may be forced to look to state-specific avenues of relief. Of course, these rules vary widely state-by-state and even some federal courts are considering entertaining some federal bankruptcy protection claims.
FDA and FTC continue to pursue significant enforcement action against CBD companies, with a change in target.
The Food and Drug Administration (FDA) and Federal Trade Commission (FTC) have been aggressively cracking down on marketing claims of CBD products since late last year. And while the number of Warning Letters from FDA slowed significantly in March, the agency is taking another headline stance against unsubstantiated CBD claims. This time, it’s in response to claims of COVID-19 benefits.
Similar to when FDA cracked down on claims that CBD could be used as an opioid replacement, this latest batch of warning letters has been equally as aggressive. FDA says it is “actively monitoring for any firms marketing products with fraudulent COVID-19 prevention and treatment claims.” Beyond Warning Letters, FDA is also pursuing seizures or injunctions against products and firms or individuals that violate the law and unlawfully promote products that could treat COVID-19.
Look for state recreational legalization efforts to ramp up as tax shortfalls from COVID-19 present new challenges.
As more states come to grips with the substantial tax shortfalls that await as a result of COVID-19, potential tax revenue from recreational cannabis legalization is becoming increasingly more attractive. While this may take some time to develop, there’s certainly a lot of chatter behind the scenes about it.
Like alcohol, which saw sales jump more than 240 percent in the immediate aftermath of lockdown announcements, some legal sellers have seen record sales of cannabis during the COVID-19 crisis as customers stock up for the many days they’ll spend at home. While demand hasn’t increased for all sellers in all states, the tax revenue gained by legalizing cannabis sales should not be overlooked. Those states considering legalizing recreational use are much more likely to push forward legislation as tax revenue from retail, hospitality, and other sectors has fallen to all-time lows.
Expect little in the form of federal legislative changes. Unless...
Back in January, Members of the House Energy and Commerce Committee, Subcommittee on Health held a legislative hearing to discuss multiple bills aimed at amending Cannabis laws. Unfortunately, COVID-19 put an immediate halt to any further discussions on the matter.
Right now, it would be safe to say that federal legislators are much too preoccupied with COVID-19 to be concerned with any changes to cannabis regulation or legislation. From providing protections to employees and employers, to the longer-term changes COVID-19 will have on the economy, it’s difficult to see any significant law passed before the general election that doesn’t directly address the pandemic. Don’t expect any movement on revising regulations to allow bankers to serve cannabis companies any time soon, either.
Now, all that said, it would not be unprecedented for lawmakers to try to squeeze in an amendment to a larger bill that addresses a side issue like cannabis. This type of action has been done before. However, considering the gravity of the situation in which many Americans and U.S. businesses find themselves these days, that prospect is becoming less and less likely as time goes on, according to Buchanan’s government relations teams in D.C. Buchanan’s government relations team will continue to monitor any legislative action in this area.
With many clinical trials being disrupted by COVID-19, there are ways to continue R&D despite the challenges.
Unsurprisingly, many clinical trials and other R&D departments have been put on hold because of COVID-19. Stay-at-home requirements and social distancing guidelines have made many in-person trials essentially impossible.
However, there are ways to deal with these challenges and continue research in some form. From virtual check-ins with test subjects to the ability to conduct new statistical analyses that maintain safe social distancing while limiting patient size, the FDA is willing to be flexible to an extent. In March, the FDA issued guidance on conducting clinical trials during COVID-19 and has been making updates to it as the weeks have gone on. While it’s not perfect, the ability to push forward some R&D during the pandemic means cannabis companies seeking to investigate the therapeutic uses of cannabis don’t need to pause their work entirely.
While it may be easy to take a back seat during uncertain times like these, now is the time to be speaking to lawmakers and getting involved in the development of state and federal laws. As one of the top cannabis practices in the nation, Buchanan’s multi-disciplinary team has spent years building close relationships with the key players who will shape the future of cannabis law. From litigation and government relations to regulatory compliance and new product development, our team has a holistic view of the industry and a keen sense of where it may go both now and in the near future.
Buchanan's Cannabis Law practice is ranked nationally in the Chambers USA 2020 guide. Our multi-disciplinary team is immersed in understanding this ever-changing industry, providing counsel to legalized operators in the industry, as well as clients who provide goods and services to the industry – from start-ups to large national companies.
For more cutting-edge perspectives on legal and business implications of COVID-19, visit our COVID-19 resource center.