The Many (Unanswered) Questions of Legalized Marijuana

There are large cannabis questions in the air that many believe will be heavily impacted by the upcoming election.  They are likely correct, and the questions, with so many moving parts, become a matter of reading the cannabis leaves.  What happens, for instance, if the SAFE Act (H.R. 1595) passes, or is rolled into the HEROES Act (H.R.6800), as many have mentioned that it could be?  What happens if the MORE Act (S.2227) passes and marijuana is no longer a scheduled narcotic?  What happens if the 5 states with cannabis on the ballot in 2020 succeed in passage, and we add 5 more states to the 34 already with some form of legal cannabis?

There are more questions than specific answers, but there are some not so far out there predictions.

One of the big questions industry insiders keep asking is what does the cannabis world look like the day after the MORE Act passes?  The answer is complicated.  If the MORE Act passes, then from a federal perspective, marijuana will no longer be a scheduled narcotic.  As we continue to learn from the 2018 Farm Bill and the decriminalization of hemp, however, there is still plenty of smoke in the air. [For purposes of this short article, cannabis refers to the marijuana side of the family tree, not the hemp side.]

What about a state’s right to regulate within its borders like alcohol and tobacco?  What about the interstate transportation of cannabis products?  What about veterans?  How might the de-scheduling of cannabis disrupt the industry stakeholders from without?  Are the monster multi-national corporations going to take over?  What about taxes and 280(E)? May a cannabis business easily open a bank account?  Simply de-scheduling cannabis does not answer a dizzying number of questions.

The current industry wants to be fully legitimized, taxed fairly, have access to traditional banking and finance options, have available R&D tax credits, etc.  The current industry also does not want to be subsumed by giant competitors after the years of blood and sweat building out the industry and fighting the good fight.

And the answers?  The federal framework, even though it is very much in its formative stage, is being wrangled behind the scenes. The wind seems to blow in the direction of a framework that looks very much like tobacco and alcohol, which makes sense.  As for taxes, if 280(E) goes away, then a new, far less punitive tax structure will likely be built to allow reinvestment in businesses and eliminate the current subsidy to the black markets.  The new tax structure will likely include an excise tax as in the MORE Act, and state by state taxes as with tobacco.

Beyond that, it is easy to predict that the big players will come if the barriers to entry fall and cannabis becomes “legal” in all 50 states (subject to individual state regulation.)  For big industry, the stigma, the lack of and R&D tax credit, and an immature market are barriers to entering the cannabis world, among others.  Remove them and they will come.  Large sin payers like alcohol and tobacco are already invested, large down the line supply-chain players from the soil to packaging are already invested, and the traditional giants will come when they can market a product at a profit without fear of shareholder reprisal, political backlash, and on a national scale.  It’s just business.

Every consumer product market on the planet is a pyramid shaped enterprise.  Over time, a few dominant players will control the large majority of the market, and the small niche businesses will fill the rest.  Many of those building businesses in the market today are speculating on time frames and positioning themselves to be attractive targets for acquisition.  Being well positioned for either large and very scalable growth, or acquisition, is a key to the current cannabis market at every point in the supply-chain.

The detailed answers to these questions and more will be determined by how the new laws are written, how the regulatory authorities approach the changes, and crystalize over the next few years.  If you are invested in the cannabis world at any point on the supply-chain, is it important to stay on top of changes and to be part of the conversation.

If you have questions about regulatory compliance, transactions and corporate law, contracts, banking, doing business with cannabis related businesses, or other matters, please contact Steve Smith.