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Legally Psychedelic: Gearing Up for the Launch of the State-Regulated Psilocybin Industry

Article by: Zuber Lawler Partner Jeff ZuberZuber Lawler Counsel Raza Lawrence, and Zuber Lawler Associate Lizzie Fanckboner.

We are quickly approaching a significant milestone in the history of the American psychedelics industry.  On January 2, 2023, Oregon will be the first state in the nation to accept licensing applications from applicants seeking to participate in its commercial psilocybin industry — a state-licensed industry that will remain illegal under federal law. Under Oregon’s new regulated system, psilocybin will be produced by licensed manufacturers, and distributed and used at licensed service centers, under the supervision of trained and licensed facilitators. The psilocybin may be sold to and used by anyone who is at least 21 years old.  A doctor’s recommendation is not required. The Oregon Health Authority (“OHA”) will oversee the entire program, and is in the midst of finalizing the regulations that will govern the new industry.

Now is the time for trailblazers in the industry to consider where they may fit into this emerging market.  In light of language of the voter-approved 2020 ballot measure, codified as the Oregon Psilocybin Services Act, we have a good idea of how the Oregon industry will be structured.  We also have draft industry regulations that were issued in November 2022, which can be found here. The regulations are slated to be finalized and adopted by the OHA later this month before the first applications are accepted next month.  Some of the details in the draft regulations are likely to change, in light of a public comment period that is now closed.  Enough details are clear, however, to enable potential applicants to begin making plans.

Most notably, potential applicants now know where they may launch their businesses. In order to participate in the application process, applicants must lease or purchase property in a city or county that has remained opted in to the psilocybin program, and that complies with state and local location requirements. Cities and counties (in unincorporated areas not part of any city) were afforded an option to “opt out” of participation in the Oregon Psilocybin Services Act by putting the matter to a vote in the November 2022 state-wide election. This means that psilocybin businesses cannot be located in jurisdictions that have opted-out of the Oregon Psilocybin Services Act, as a consequence of the voters’ voice.

Overall, 25 out of the 36 counties in the state have opted out of the program. The eleven counties that did not opt out, and where psilocybin licenses will be available in unincorporated areas, are: Benton, Columbia, Deschutes, Jackson, Lincoln, Lane, Hood River, Multnomah, Wasco, Yamhill, and Washington. It should be noted, however, that some cities in those counties have opted out. And conversely, various cities have opted in, while the county in which they are located opted out.  Notably, not a single city with a population over 40,000 people (including Portland, the largest city) opted out of the program.  Thus, the only areas from which psilocybin businesses will be categorically excluded are some unincorporated areas, and some cities with populations under 40,000 people.  A map of the locations that have and have not opted out, published by Psychedelic Alpha, can be found here.

Local governments will likely implement additional psilocybin location rules over time, but applicants at least now know which jurisdictions will be friendly, and can start initiating dialogues with local officials about the viability of licensed psilocybin business locations.  Ultimately, in order to apply for a license, applicants will need to submit a Land Use Compatibility Statement, signed by a local official, indicating that the proposed land use has been reviewed and is not prohibited at the designated location.

For decades, psilocybin and other plant-based psychedelic substances have been classified as Schedule 1 controlled substances under the federal Controlled Substances Act. As a result, their production and distribution have been subject to severe criminal penalties and asset forfeiture. Federal illegality has also contributed toward a social stigma surrounding these substances, although they have been safely used in various human societies for thousands of years.  While psilocybin and other plant-based psychedelics are generally non-toxic and non-addictive, and there is abundant evidence of their mental health benefits, they have been swept up in a broader “War on Drugs” that has largely kept them underground in recent decades. The tide is turning, however, and psychedelics now have widespread, bipartisan public and expert support.

Despite continuing federal illegality, Oregon is launching its first-in-the-nation commercial psilocybin licensing program. It remains to be seen how the federal government will treat participants in Oregon’s system, given the continuing Schedule 1 status under federal law. There is reason to believe, however, that the federal government will follow its recent approach to the state-licensed cannabis industry, where it thus far declines to take any enforcement action against businesses participating in and complying with a tightly-regulated state-licensed industry.  It is certainly not guaranteed, however, that the path to legality for cannabis and psychedelics, substances with notably different characteristics, will follow identical paths.  If Oregon successfully launches its licensed psilocybin industry, that should give assurance to people around the country that similar approaches could work in their jurisdictions.

Many people believe the Oregon Psilocybin Services Act will be the start of a psychedelics revolution that could usher in a profound effect on the American health care system and the broader economy. In the November 2022 election, Colorado became the second state to approve a psilocybin licensing program, and lawmakers in other states around the country have proposed similar plans. Meanwhile, the federal government is slowly reversing its prohibitionist mindset, with the Department of Health and Human Services announcing in May 2022 that regulators will likely approve psilocybin as a designated breakthrough therapy for depression within the next 2 years.

Due to the conflict between federal law and state psilocybin laws, there are lessons to be learned from the cannabis industry, which has been navigating the federal-state conflict-of-law issues for years now. Among other things, the federal illegality will have substantial impacts on banking and taxes, and will largely prevent psychedelic transactions occurring across state or international lines. In the early days of the industry, there will likely be many open issues and questions relating to the conflict-of-law issues, which will hopefully be sorted out sooner rather than later.  In the meantime, it is exciting to be a part of this emerging industry, following decades of a market that was driven completely underground by prohibition.

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