What's Holding Cannabis Back? The Deadly Sins
The time has officially come for commercial businesses, as companies vie for cannabis licensing in California as of the beginning of last year. Within a few days of this being kicked off, the former United States Attorney General – Jeff Sessions officially rescinded all of the previous federal enforcement of the Controlled Substances Act from the Department of Justice.
To say that this caused some anarchy would be an understatement, thanks to Sessions doing this, what was previously an orderly rush by businesses turned into chaos, with the industry in California being thrown every which way.
It's interesting to consider the fact that the chaos got started with preliminary licensing in accordance with the Medicinal and Adult-Use Cannabis Regulation and Safety Act (Known under the acronym MAUCRSA) which never really ebbed away.
Even as we flash forward to this year, is the atmosphere clearer for businesses? Well, not according to those that are on the ground floor in the state. There have been plenty of entrepreneurs and clients that still refer to it as a ‘mess' or wholly dysfunctional in terms of obtaining licensing for cannabis.
Over this stretch of time, states within the US have taken the time to re-acclimate themselves, however. And the state of California is no stranger to the need to do this. The only real disadvantage is that it is much bigger than other states in the union. This is true both in population-scale and the size of its cannabis market.
One of the other challenges comes from the ongoing maturation and consolidation of enterprises in the state is coinciding with a cementing of enforcement from regional regulators means that the whole process of getting registered will now take longer.
No matter what kind of industry you're looking at, there are going to be bad actors and entities that are responsible for detrimental behavior. If you've been one of the unfortunate types to be directly subjected to it, then you can at least take solace in knowing that you're not alone.
But what does this bad activity generally entail? Well, there are roughly seven ‘deadly sins' from the cannabis industry that are quite prominent. But while these are easily noticeable, it's looking more likely that, with the professionalization of the industry, we'll get to see this activity recede.
Companies Operating Without a License
The most cliche issues tend to be the most common, and it's no grand surprise that, with the maelstrom that is the cannabis market in California, there's a massive black market for it. Considering just how massive the industry is as a whole, proportionally speaking, it's likely that, rather than professionalization eradicating this under-ground market, it will persist in some capacity.
The reason being that there are iconoclastic ‘businesses' out there across a good number of cities and counties in California that simply will not abide by regulations in order to get onto legalization. The unfortunate circumstance with this is that these same areas become hot sports for drug dealers, cartels and other criminal operators/ions.
Along with this chronic issue, in regions of the state like Los Angeles, for example, there is a pervasive culture of persistence that's resulted in the establishment of fly-by-night stores as well as delivery solutions which undergo shutdowns only to re-emerge on a recurring basis. One of the fortunate things is that the state has actually ramped up the kind of fines and punishments for illegal operators; imposing steep fines, penalties and even criminal prosecution for offenders.
But the question of whether or not this will ‘eliminate' this black market remains the same. The better question is what kind of impact will firmer legislation have on the black market that's already here.
The Legislative Whiplash
There is still a substantial amount of legislative dust that needs to settle before entrepreneurs can see the line they have to walk to set up a cannabis company in California.
According to business attorneys that specialize in the industry still get a number of calls from people that want to establish, what they refer to as non-profit ‘collective' entity in accordance with the Compassionate Use Act of 1996.
While this sounds like a pretty straight forward thing to ask, until you realize that the Compassionate Use Act technically ‘died' back in January 2019, and it's not coming back, no matter how much we wish it would.
Even though some of these people know that this is the case, there are those that simply establish their collectives anyway with the knowledge that they are very clearly violating the law by doing so. While other issues may linger, this is one that will likely burn away entirely for some very obvious reasons on financial and organizational reasons.
If, for example, you're an investor and someone is trying to sell you on a non-profit collective based in California, or a legal attorney is advising you to create one to circumvent legislation, you'll easily know where the door is and head there expediently.
Messed up M&A
It is no easy thing to establish a company of this capacity. And it's not helped at all by the fact that state and local licensing laws can get so convoluted along with changes in ownership protocols. Whether it's because of this or not, there are a lot of people that are effectively violating state and local laws all through M&A within the state.
Much like some previously mentioned sins, this is something that will be taken care of in time, especially as regulators start to catch on to the recklessness demonstrated by individuals and companies here. This will result in a large number of license cancellations and a whole lot of investment being lost as a consequence.
Until this time, however, a lot of cannabis businesses that have sold off ownership interests are sitting on a wide range rule violations because of the inconsistency demonstrated by law and regulatory enforcers in concert with buyers momentum.
Terrible Legal Advice
Cannabis is still very much an emerging industry and market, and considering the fact that it is still considered illegal on a federal level means that the amount of investors and law firms out there willing to dive into the market remain few and far between. That is, of course, unless they're a small practice group that provide counsel on employment and financing.
The problem with this is that it's led to an explosion of an almost legal ‘black market' to take place. With a large number of self-professed legal professionals (hacks) and newbies joining the industry as ‘experts' within the industry to fill this legalistic gap.
This doesn't include the number of criminal defense attorneys that also claim to do legitimate business with these companies as well. The problem is that this results in an increasing number of businesses seeking out help with issues from hack attorneys such as inventory purchase agreements, property licensing, distribution contracts, among other areas.
With the maturing of the market, it's hoped that these same bad, unqualified or under qualified actors will melt away as institutional legal counsel and investors become readily available.
Regulators Moving the (Legal) Goalposts
What makes the situation all the more frustrating for cannabis companies is the fact that state regulators have this annoying tendency of shifting the rules or, to put it a better way shift the metaphorical goalposts so that the rules line up better with their ‘interpretation,' which is becoming ever more problematic as time goes on.
California, much like any state out there, is no different. There have certainly been companies out there that have had their fair share of conversations with state agencies when it comes to change of ownership, distribution laws / rules, testing guidelines, return policies and other typical licensee tasks that literally result in different answers depending on who you talk to and when you ask.
This is another industry issue that will likely rise and collapse as the political changing of the guard takes place. As this happens, state interpretations of rules will also change, hopefully to be replaced with a more business friendly approach. At this moment in time, it is a headache to be a regulator, but it's only a matter of time before these entities can get themselves into a consistency.
Compared to other states, California operates as a local control state. What this means is that, in order to establish a business, you need to ensure that you have local approval before securing a state license. Meaning that you need local approval for your cannabis business from both the city and your county.
What makes this even more of a pain in your ass is the fact that each one of more than 482 cities and 58 over-arching counties within the state approach regulation and prohibition in their own way.
Simply put – undergoing authorization on a local level is anguish in itself, and it seems as though both the county and cities have worked together to really drag out the process until it becomes a bureaucratic nightmare. Between choosing to flip positions between allowing your business or prohibiting it (sometimes repeatedly), and even simply changing the entitlement process, much to the applicant's chagrin.
If you need any kind of example of this, then look no further than the City of Los Angeles itself. It represents a massive, agonizing example with its overly complicated issues, with three phases of local licensing and implementing of a social equity program, which the city then needs to refine for months upon months.
This is in stark contrast with LA County, which commissioned an independent group study in order to assess the implications of legalization and regulation and even set up its own Office of Cannabis Management. All while STILL having a ban broadly in place.
No Open Banking Solutions for Companies
California's own regulations for getting a license aren’t an exceptionally tough thing to go through for a business. What makes it a pain is the fact that it's a lot of bureaucracy that you have to endure, and the state really isn't so strict, which is disproportionate with just how strict it does need to be compared to other states out there.
This is especially the case for typical financial reporting and compliance regulations. An example of this is that there's no real residency requirement in the state, so you can easily vertically integrate licenses.
Another problem that this brings is that, with no rigid system of rules and regulations being enforced, the industry won't be sufficient enough to satisfy financial guidelines set out under FinCEN back in 2014. The end result is that banking solutions for cannabis businesses will still be inaccessible for Californian based companies.
As a result, these same businesses need to open management companies that can work to secure ‘Phantom' banking for the cannabis business that it ‘represents.' Long-term, this can be more pain than it's actually worth, largely because of reporting to the IRS, and a number of other reasons.
Another potential pain is that companies may side-step banking solutions altogether and only deal in cash, which makes these businesses a very real safety hazard for the public.
For the moment, these are the kinds of hazards that are just unavoidable for the time being. But over time, with an increase in professionalization, and stability in the market, these issues will either disappear or decline significantly.