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The Main Hurdles For Cannabis Companies, State By State

Benzinga Cannabis

By Allison Margolin and Ashley Browder of Margolin & Lawrence.

As the cannabis industry evolves nationwide, certain factors continue to play a significant role in the success or hindrance of cannabis’ industries by state. 

Restrictions on outside investments, state and local regulations and oversaturation are constant roadblocks that exist in every cannabis legalized state to some degree and have a direct impact. These factors dictate who can participate in the business, they place a cap on growth opportunities, and often prevent marginalized communities from truly being able to participate.

No Outside Investors

There is a lot of talk about the lack of opportunity for outside investors to get in on states’ local cannabis industries. Foreign investors are looking to collaborate, but the general consensus from state and local regulation has been negative. This position, however, is beginning to change.

In Oregon the House recently passed a bill that would allow the governor to make collaborative agreements with other states for the transfer of marijuana, thereby allowing a way for outside investors to profit from Oregon’s cannabis industry.
In California, existing cannabis businesses have been given the greatest advantage over any new players but that hasn’t prevented investors from trying to get a piece of California’s industry. Existing California regulations allow companies to dramatically expand to develop chain locations around the state, which then boosts the manufacturing aspect. Outside investors like the opportunities that California provides, which keeps the investments strong despite a plethora of players.

Arizona, on the other hand, is expanding its cannabis industry quite conservatively and numerous restrictions on vertical integration keep investors from being able to participate in multiple cannabis areas. Without outside loans, Arizona investors must put up tons of cash to support start-up costs, which have been made extremely expensive in part by Arizona’s strict requirements.

Nevada experienced some internal trouble with applicants claiming the licensing process is unfair and biased, but the state court held that while the system wasn’t perfect, there were no valid claims for unfairness. About three dozen applicants disagree, however. Colorado was one of the leaders in the cannabis industry, but since they do not allow outside investors, this has really stunted the Colorado’s growth as big investors begin to put their money elsewhere. The state has finally taken notice and Colorado Gov. Jared Polis signed a bill recently that opens Colorado’s cannabis industry to outside investors.

Oversaturation

In Washington, data gathered by a Marijuana research agency disclosed over 360 manufacturers and over 640 product lines available to consumers throughout the state. The increase in products and players has accelerated quickly just within a year. This makes unique and appealing branding extremely important to the success of businesses in Washington’s fast-growing market.

In California we see a lot of businesses making a move from the golden state in the hopes of creating a more consistent audience elsewhere, with less competition and less regulation. California’s booming illicit market is also making it hard for legitimate businesses to stay alive, because compliance is expensive - and users prefer no taxed eighths. While illegitimacy continues to be a problem, cannabis has become a prominent industry for increasing employment. Supply and demand continue to push up salaries in the cannabis market. This illustrates that California’s cannabis audience is big enough for all.
Arizona has not seen any arrest of growth due to oversaturation. In fact, medical marijuana sales in Arizona grew by 41% from 2017 to 2018, outpacing the growth of the patient pool by 2-to-1, according to reports generated by the state’s health department.

State and Local Regulations

Local municipalities are also making it hard for cannabis industries to thrive with heavy taxation and regulations. One positive from legalization should have been the new revenue generated in local cities but as the years passed, constituents are still waiting for the benefits to manifest. So while some states are still criminalizing cannabis possession others are making it too difficult to either get involved initially or to break even as a business owner.

We see this in local city and county bans that prevent cannabis businesses within their city lines such as in Oregon and California. However, CA chose not to increase their excise tax that was originally set to increase in a wave of good fortune.

Washington state has increased packaging and advertising requirements which owners say will negatively affect their bottom line but has also reformed how penalties are given out by the state liquor and cannabis board starting with a warning rather than penalizing businesses initially.

Arizona may soon require independent lab testing for cannabis products but the states Supreme court did just rule that extracts were in fact, legal. Although Nevada just passed on-site social consumption, they’ve placed a ban on distributing those licenses at least for the next two years and a top Nevada federal prosecutor has stated that prosecuting cannabis businesses is still an option for his office although not a priority. On track with Colorado’s new outside investor option, the state is also allowing businesses to apply for on-site social consumption and existing businesses to apply for delivery permits, though both will ultimately be contingent on local regulation.  

Allison Margolin is a Senior Partner at Margolin & Lawrence Law Firm Beverly Hills, CA.

Ashley Browder is a Social Media Ambassador for Margolin & Lawrence.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Image by Javier Hasse, using free-use stock images.

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