Investment Implications of Potential Cannabis Deregulation Under Trump

The cannabis sector experienced explosive gains in December 2025 following reports that President Trump plans to reclassify marijuana from Schedule I to Schedule III, representing the most significant federal policy shift toward cannabis in decades [1]. Major cannabis ETFs surged 20-55% in a single day, with sector leaders like Tilray Brands (TLRY) and Curaleaf Holdings (CURLF) posting gains of 27.5% and 23.6% respectively [0][1]. However, investors must carefully evaluate the risk-reward profile given ongoing regulatory uncertainty and the complex implementation timeline ahead.

• Current Classification
  : Schedule I (no accepted medical use, high abuse potential) alongside heroin and LSD [2]
• Proposed Classification
  : Schedule III (accepted medical use, moderate abuse potential) alongside Tylenol with codeine and anabolic steroids [3]

: Industry experts caution that rescheduling is not instantaneous and requires DEA formal rulemaking before taking effect [4]. The process could take months to complete, creating a prolonged period of uncertainty.

The most significant immediate impact would be relief from Section 280E of the U.S. tax code, which prevents cannabis businesses from deducting normal business expenses [5]. This change could:

• Reduce effective tax rates
  from 60-80% to standard corporate rates (~21%)
• Improve profit margins
  by 20-30 percentage points for profitable operators
• Accelerate path to profitability
  for currently unprofitable companies

Schedule III reclassification would partially address banking constraints:

• Partial banking access
  : Some financial institutions may begin serving cannabis companies, though many may remain cautious without full federal legalization [6]
• Lower financing costs
  : Reduced reliance on high-cost alternative lenders
• Institutional investment
  : Greater access to institutional capital and traditional investment funds

Lower tax burdens and improved access to capital would likely accelerate industry consolidation:

• Larger players
  could acquire smaller operators at more attractive valuations
• Cross-state expansion
  becomes more financially viable
• International expansion
  benefits from improved U.S. legitimacy

: The DEA must complete formal rulemaking, which faces potential legal challenges and delays [4].

: Schedule III classification does not legalize cannabis federally or resolve state-federal conflicts [3]. Key limitations remain:

• No interstate commerce
• No federal legalization
• Continued banking restrictions for some institutions

: Future administrations could reverse the reclassification, creating long-term policy uncertainty.

:

• Tilray Brands (TLRY)
  : Despite recent surge, shows concerning fundamentals with P/E ratio of -0.49x, ROE of -96.86%, and net profit margin of -278.12% [0]
• Curaleaf Holdings (CURLF)
  : Better positioned with analyst consensus BUY rating and $11.75 price target (+158% upside), but still negative at P/E of -13.37x [0]

:

• High volatility and speculative trading (volume spikes of 525% above average) [1]
• Short interest manipulation potential (TLRY short interest up 981% in recent period) [1]
• Execution risk in translating policy changes to operational improvements

: Maintain cautious exposure to capitalize on policy announcement momentum but expect high volatility. Consider:

• Limited position sizes (2-3% of portfolio maximum)
• Focus on ETFs for diversification rather than individual stocks
• Use options strategies to manage downside risk

: Increase exposure if DEA implementation progresses smoothly:

• Prioritize companies with strong balance sheets and operational excellence
• Focus on multi-state operators (MSOs) with proven execution track records
• Consider ancillary businesses that benefit from industry growth without direct regulatory risk

: Full exposure based on successful implementation:

• Diversify across different cannabis sub-sectors (cultivation, retail, ancillary services)
• Consider international cannabis companies with U.S. expansion potential
• Monitor M&A activity for consolidation opportunities

:

• Positive or improving operating margins
• Strong balance sheets with manageable debt levels
• Proven ability to generate positive cash flow

:

• Multi-state operational footprint
• Strong brand recognition and customer loyalty
• Experienced management team with regulatory expertise

:

• Diversified revenue streams across product categories
• International expansion capabilities
• Technology and operational efficiency advantages

: Limit cannabis exposure to 5-10% of total portfolio due to regulatory uncertainty.

: Implement 20-25% stop-loss levels given high volatility.

: Use ETFs (MSOS, YOLO, WEED) rather than individual stock picking for most investors.

: Track DEA rulemaking progress, congressional developments, and state-level regulatory changes.

The potential rescheduling of cannabis to Schedule III under Trump represents a transformative opportunity for the cannabis sector, potentially unlocking billions in value through tax reform, improved access to capital, and industry consolidation. However, the path from policy announcement to implementation is complex and fraught with uncertainty.

Investors should approach the sector with cautious optimism, implementing a phased investment strategy that balances the significant upside potential against material regulatory and execution risks. Companies with strong fundamentals, proven operational excellence, and strategic positioning are best positioned to benefit from regulatory changes while weathering the inevitable volatility ahead.

The current rally may be premature given the lengthy implementation timeline, suggesting that patient, selective investors will likely be rewarded over those chasing short-term momentum in this high-risk, high-reward sector.

[0] Ginlix API Data
[1] Bloomberg - “Pot Stocks Rise on Trump Plan to Ease Cannabis Restrictions” (https://www.bloomberg.com/news/articles/2025-12-12/trump-plans-to-push-for-cannabis-rescheduling-as-less-dangerous)
[2] Yahoo Finance - “Cannabis ETFs Soar Double-Digits on Friday: Here’s Why” (https://finance.yahoo.com/news/cannabis-etfs-soar-double-digits-110000651.html)
[3] CBS News - “Trump could reschedule marijuana to Schedule III, promising tax relief but raising new legal and industry concerns” (https://www.cbsnews.com/atlanta/news/trump-reschedules-marijuana-to-schedule-iii-promising-tax-relief-but-raising-new-legal-and-industry-concerns/)
[4] Forbes - “White House Says President Trump Has Made ‘No Final Decisions’ Around Marijuana Rescheduling” (https://www.forbes.com/sites/willyakowicz/2025/12/11/white-house-says-president-trump-has-made-no-final-decisions-around-marijuana-rescheduling/)
[5] Yahoo Finance - “Explainer-How US marijuana reclassification could help” (https://ca.finance.yahoo.com/news/explainer-us-marijuana-reclassification-could-115913298.html)
[6] Marijuana Moment - “Bipartisan Congressional Lawmakers Give Mixed Reactions To Marijuana Rescheduling News From Trump Administration” (https://www.marijuanamoment.net/bipartisan-congressional-lawmakers-give-mixed-reactions-to-marijuana-rescheduling-news-from-trump-administration/)