High 10 Classes from Hashish for the Future Regulated Psychedelic Business

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psychedelics regulation laws

On November 3, 2020, Oregon voters approved Measure 109, which paved the way for a regimen of psilocybin for therapeutic use in just a few years.

Major cities across the country have also passed decriminalization measures for psilocybin and other entheogenic (psychedelic) plants, including Ann Arbor, Denver, Oakland, Santa Cruz, and most recently Washington, DC (however, we note that decriminalization is not legalization). It is only a matter of time before states take Oregon’s approach and begin regulating psilocybin.

Assuming the federal government does not amend federal law first (and this is certainly a possibility given the Food and Drug Administration’s approval of drug trials for psilocybin), it is very likely that many of the legal issues that the regulated psilocybin is facing will face are similar. if not identical to problems faced by the state-regulated cannabis industry.

In a previous post, we discussed similarities and differences between the psilocybin and cannabis legalization movements. In this post, we’re going to look at the top 10 topics that are likely to carry over from cannabis to psychedelics more generally.

1. Federal Legislation

Even if states follow Oregon’s step and legalize psilocybin therapy, federal law won’t change that. Currently psilocybin is a List I narcotic under the Federal Controlled Substances Act (CSA). This means that it and other entheogenic plants or psychedelic substances are treated the same way as heroin. It remains to be seen whether the federal government would take the same route of non-enforcement of the CSA against psilocybin operators in states that regulate the use or sale of psilocybin. In other words, it is unclear if there will ever be such a thing as a cole memo for psilocybin. But inevitably there will be tensions between state and federal law.

2. Contract issues

Whether or not the federal government takes a non-enforcement position, psilocybin contracts will face serious problems given federal law. Federal courts (and possibly even state courts) may refuse to enforce contracts with a nationwide illegal substance, even if state law allows it. This problem still occurs with cannabis operators and can be a major problem. You can find some of our articles on federal legality at:

3. Tax problems

The bane of the existence of many cannabis operators is the Internal Revenue Code Section 280E, and it will be no different for psychedelics companies as long as psychedelics remain on Appendix I of the CSA. This section states:

No deduction or credit is permitted for amounts paid or accrued during the tax year for the pursuit of a trade or business if that trade or business (or the activities that comprise such trade or business) are in trade with controlled substances (in the sense of meaning) exists according to appendix I and II of the law on controlled substances), which is prohibited by federal law or by the law of a country in which such trade or business is carried out.

In other words, companies dealing in certain controlled substances have immense restrictions on what they can deduct when paying federal taxes. State law does not change this. Further information on our analysis of Section 280E can be found at:

4. Access to banking

At the 280E level in terms of anger for cannabis companies is the lack of access to banking. Despite the fact that the Financial Crimes Enforcement Network (FinCEN) issued a memo in 2014 containing guidelines for banks attempting to transfer cannabis funds, many banks did not jump on board. Even today, cannabis companies in regulated states can find it difficult to gain access to banking business. Even though hemp is now legal and even though FinCen and the National Credit Union Association have provided guidelines for hemp banks, it can even be a challenge for hemp companies to gain access to banks. These problems will no doubt remain for psychedelic companies.

5. No federal trademarks

Trademarks will not be issued for goods or services that are not legal (our analysis of trademark legal issues can be found here). When states regulate psilocybin, they can allow licensees to get trademarks at the state level, but those same companies can’t get trademark registrations from the U.S. Patent and Trademark Office unless and until federal law changes. This means that psilocybin companies like cannabis companies can have very limited brand protection.

6. No bankruptcy protection

Bankruptcy protection is not available for cannabis companies due to federal illegality (see our analysis here). These problems will persist for psychedelics companies as well.

7. RICO suits

In the past, our cannabis attorneys have fought a ton of civil RICO litigation in federal courts in the United States. RICO (Racketeer Influenced and Corrupt Organizations Act) is a federal act that provides a civil cause of action for acts carried out under an ongoing criminal organization (in addition to criminal penalties). These lawsuits were often filed by neighbors of cannabis growers who tried to build a conspiracy to shut down the grower and their suppliers. They’ve become rarer over the years, but we assume there are a variety of RICO suits for psychedelic companies in regulated states.

For more information on RICO cannabis litigation, see the following sections:

8. Leasing problems

Federal legality also affects leasing. As we explained earlier for cannabis leases:

Once the landlord’s bank finds out that they are renting their property to a cannabis tenant (because they paid in cash too often or because the bank is reviewing collateral), there are numerous mortgage violations. Why? Because this (usually) boiler plate document dictates that there is no litter or illegal activity on the collateral and that a cannabis tenant is in direct violation of federal law and thus the mortgage agreement between the landlord and their bank. This situation should be reconciled with the relationship between cannabis tenants and landlords from the outset, as it is highly unlikely that the landlord will be able to successfully drive the bank back and lose ownership to the bank as a result.

In other words, leasing to psilocybin tenants is a risk to landlords, even with government regulations. This usually results in much higher rents and much more aggressive rental terms (e.g. tons of guarantees from affiliates and tenant owners, hyperaggressive termination rights, and possibly even security concerns). These companies also have problems with real estate bank financing.

9. Insurance

Companies that deal in Schedule I Controlled Substances have trouble getting insurance. From using property insurance to facilitate real estate transactions to taking out ordinary insurance policies, the psychedelic industry will be more challenging. Insurance for cannabis companies is fairly available these days, but it hasn’t always been. Expect many problems in the early stages of legalization and regulation.

10. Immigration

Any non-US citizen participating in the future psychedelics industry, even if legally legal to do so, risks being denied entry to the United States, banned from the United States, or denied citizenship. While the Biden administration will play a less aggressive role in immigration policy than President Trump, risks stemming from violating federal law are unlikely to go away. Entrepreneurs need to seriously consider the impact immigration laws will have on their proposed business model. You can find some posts on cannabis immigration issues at:

Conclusion

Once states tackle the regulation of psilocybin and other entheogens, it is clear that businesses will face many hurdles. Fortunately, the regulatory lessons learned in the cannabis industry all seem to apply, at least to the extent that the federal government takes the same position it has taken for the cannabis industry, which remains to be seen. Check out the law Law Blog for more updates.