The biz grows beyond state lines, but not all is well
Marguerite Arnold
One sign that the cannabis industry has matured over the past 18 months is the increasingly sophisticated, multi-state presence of some of the most deep-pocketed players. Even though marijuana (or even CBD products) cannot legally cross state lines, the same does not hold true of businesses that win licences in multiple states and grow local. Increasingly, successful brands and companies established in California, Colorado, Nevada and Washington are branching out into other legalizing states. Alaska’s new market may even require that. Some, particularly those who focus on marijuana technology and compliance, are carving out a national presence even before marijuana gets rescheduled.
“We think this can be positive because it allows for expansion in an industry with laws that often limit local expansion,” said Julianna Carella, CEO of the California-based edibles company Auntie Dolores.
Leslie Bocskor, both an investor and industry advisor via his company Electrum Partners and in his role as the founding chair of the Nevada Cannabis Industry Association, sees positives and negatives arising from this outcome. He concurs with Carella about the opportunities this creates for established brands. However, “on the flip side, as more states come online and the market continues to grow, these same benefits have the potential, as in any industry, for cronyism and collusion at worst,” he said. This is inevitably leading to what he described as “large-scale buyouts of smaller operations and the resulting corporatization of the industry at best.”
What a multi-state presence requires, despite a successful product, is deep enough pockets to pay the increasingly exorbitant application and operating fees now charged by nearly every newly legal marijuana state. As Carella said, “The negative is that often small upstarts are not able to obtain these licenses because they are only awarded to existing businesses with experience, regardless of previous location. This makes it challenging for new businesses to get started.”
In medical-only markets, in particular, these huge upfront costs required by the states do two things: drive up the cost of the product and keep smaller entrepreneurs out of the market. From the state administrative perspective, the industry is increasingly seen as a new way to pay for schools, roads, infrastructure and other sorely needed municipal expenditures. As a result, however, the financial obligations required to even get in on the ground floor in every state have increasingly gone beyond mom and pop in most states where marijuana is now legal. In some states, including New York, Florida, Nevada and Minnesota, the game is out of reach for all but the largest players. In Ohio, one group of investors may succeed in locking everyone else out of the state business — from within the state or elsewhere.
This in turn is leading to the rise of the multi-state operator, particularly in the most restricted markets. Alaska, which is still considering whether to ban third-party investment from in-state enterprises, may well go the same way. In Washington State, the inevitable course of the recreational market has already sealed the fates of unlicensed medical dispensaries.
In Florida, where a highly-contested CBD licensing process is opened in mid-June, the process is already so exclusive that only nurseries with more than 30 years growing experience with the capacity to grow at least 400,000 plants can even apply. In New York right now, an operator who successfully bid for a coveted Minnesota state license is going for one of five that the Empire State expects to grant in early August.
The rise of “smoke-free” and CBD-only state markets are but two of the downstream policy creations of legislative activism in creating the new business vertical. So is the growing discussion about the regulation of edibles and vaping for both medical and recreational purposes.
Carella is one who believes that this kind of development is harmful to both the industry and consumers. She said limiting the ways and means people can consume cannabis is another way of limiting their access.
“These types of laws are not written with the patient in mind. This is also limiting to the marketplace and creates a stifling policy that dictates what form of cannabis can and cannot be sold,” she said.
Bocskor concurs.
“Limiting the industry in such a profound way is going to hamstring the legal industry,” he said. “As we’ve seen with the War on Drugs, limited access has done little to nothing to prevent access. There’s the very likely scenario in which people continue to buy from the black market if it’s illegal to smoke, which will have the net result of a loss of tax dollars for the state on what could be an otherwise legal and taxed product.”
However, some in the thick of the battle see state intrusion into the industry and odd policy creation as an inevitable.
“While smoke-free medical marijuana states like Minnesota and New York could be considered setbacks with regards to achieving full legalization, they are proof of the ever-growing acceptance of vaporization technology, both by regulators and the general public,” said Aaron LoCascio, the CEO of VapeWorld, an online retailer. “Other medical marijuana states, such as Massachusetts, simply require all medical cannabis dispensaries to carry vaporizers for sale. As more states implement their own medical marijuana schemes, it’s likely (that) state laws will continue to reflect the ever-growing trend towards vaporizers in general.”
For now, most in the business believe that this kind of policy development will continue until federal reform and regulation settles many of these questions. In the meantime, those who are committed to the industry seem prepared to ride out the storm, including all the red tape and endless hassles.
“In order for regulation to match the marketplace we need more positive state cannabis laws to be passed allowing for legalization and regulation that favor good business practices, safety and quality above capital,” Carella said. “Regulations are constantly shifting and changing and are drastically different across state lines. This leaves businesses having to make regular changes to their packaging and business structure in order to keep up. This is costly and challenging and many great start-ups are unable to keep up.”
That said, many business owners like Carella also think that the industry has begun to meet this kind of challenge, and state legalization and regulation battles downstream are clearly trying to avoid some of the more obvious problems created by the earliest legalizing states.
“I think as more states legalize they will learn from the mistakes of the first legal states like Washington that created these laws,” Carella said. “They will see what works and what doesn’t. I think California has learned a great deal since it first had this initiative on the ballot and since other states legalized and will now be writing really beneficial legislation.”
She also believes that future legalizing states will benefit from research and data now available from burgeoning state programs and also learn from those states who did not consider many of these issues, including Washington. “Many states do not gather the crucial feedback from cannabis businesses and patients about what is truly needed to run the industry while simultaneously creating a positive community and great revenue for the state,” Carella said. “They are left, like Washington, having to redo their laws in an attempt to get it right the second time around.”
There is also another winner, often silent in more business or legislative discussions about the actual shape and specific regulations of each state market as they come online. The medical marijuana genie is out of the bottle and this time, unlike the early 1990s, it is unlikely to be contained. As Bocskor said, “This year is shaping up great for medical marijuana patients. There have been several big stories this year, some that come to mind immediately; the recent medical legalization in Texas, Hawaii moving forward with enacting legal dispensaries, Nevada dispensaries opening this year, Congress looking at marijuana to treat veterans with PTSD, it’s all exciting news. I can see a future in which patients in any states will have legal access to their medicine.”
And that would be good news for everybody involved, from business owners to consumers.