The U.S. Department of Health and Human Services has recommended reclassifying marijuana as a lower-risk drug, which would in turn ease restrictions on the budding business, a spokesperson for the Drug Enforcement Administration told CNBC on Wednesday.

Marijuana is currently a Schedule I drug under the Controlled Substances Act, meaning it’s deemed to have no currently accepted medical use and a high potential for abuse. Despite being legalized for recreational use in nearly half of states, marijuana’s federal classification alongside drugs such as heroin and LSD has hindered the industry’s growth.

After enjoying a sales surge during the Covid-19 pandemic, the industry is in free fall as investors turn away and capital dries up. The industry has also been barred from accessing most banking services, or from being traded across state lines, resulting in a glut of cannabis in many states and a drop in prices.

A federal reclassification could potentially expand the market for marijuana, which is a multibillion-dollar industry in the U.S. and a cash crop in many newly legalized states.

The news sent shares of several cannabis companies, including Canopy Growth, Tilray Brandsand Cronos Group, jumping Wednesday.

In a letter addressed to DEA officials, the HHS called for marijuana to be reclassified under the Controlled Substances Act, a DEA spokesperson told CNBC. Bloomberg, which first reported the recommendation, said the letter called for marijuana to be reclassified as a Schedule III drugs, defined as drugs with a moderate to low potential for physical and psychological dependence.

The DEA, which regulates controlled substances, has the final authority to reschedule marijuana. The agency will now initiate a review of the drug, the DEA spokesperson said.

A lack of federal regulation has meant cannabis businesses in states where recreational sales are legal still can’t access traditional banking services or institutional capital. A congressional bill called the Secure and Fair Enforcement Banking Act, or SAFE, would lift such restrictions but hasn’t made it through the Senate, despite passing in the House several times.

Patrick Rea, managing director at cannabis investment firm Poseidon Garden Ventures, said his fund is “cautiously optimistic” for the changes a reclassification could bring to the industry.

“Certainly, moving cannabis off of Schedule 1 is the right decision and long overdue,” Rea said in a statement. “Though a full descheduling would be preferred and likely most appropriate for cannabis, we welcome smart decisions and progress towards full legalization and regulation in the legal cannabis industry.”

Correction: A spokesperson for the Drug Enforcement Administration told CNBC the agency received a letter from the Department of Health and Human Services calling for marijuana to be reclassified under the Controlled Substances Act. A previous version of this story mischaracterized the spokesperson’s statement.

https://www.cnbc.com/2023/08/30/hhs-calls-for-easing-marijuana-restrictions.html