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California’s New Green Rush: Both Goldmine and Landmine

By Armin Callo, Esq.

An excerpt from this article previously appeared as an opinion editorial in The Desert Sun. Full article is to follow.

It still surprises me to realize that over half of our country now permits the use of marijuana. Now with California’s legalization of recreational use, a new Green Rush is sweeping both the Golden State and the nation overall. Almost 60 percent (59.3% to be exact) of the U.S. population now lives in an area where marijuana is legal to some degree. Well over 20 percent (22.6% to be exact) of the U.S. live in states where recreational use is legal. This has resulted in a booming cannabis industry, where new business opportunities are springing up like weeds, quite literally and figuratively. The growth is particularly robust in California, which represents the sixth largest economy in the world.

According to the University of California Agricultural Issues Center, medical marijuana resulted in more than $2 billion in sales in 2016, and the recreational marijuana market is projected to reach $5 billion in sales for 2018. The positive impact of a legal cannabis market for the Coachella Valley is also easy to compute. For local governments, it means greater tax revenues for new projects benefitting our beautiful valley. For business owners, there is both the real estate for growth and a ready market for cannabis consumption. Permanent residents and snowbirds alike benefit from ready access to cannabis, enriching resident and visitor lifestyles, particularly those with medical issues and those with advancing age.

With all the potential benefits of this new Green Rush, there are also a myriad of challenges involved. So while entering the legal cannabis market can be incredibly profitable–estimates peg the rate of return on investments in the cannabis industry as higher than they were at the peak of the dot-com boom–there are landmines all along the process. Treading carefully, given all the exposure and liability pitfalls, is not only good business practice; it is determinative of one’s survival in the industry.

In a nutshell, these landmines can be categorized into four groups: legal, financial, social and security-related matters.

Legal Challenges. From a legal perspective, participants in the cannabis industry face a much higher standard of scrutiny than your average business when it comes to legal compliance. The cannabis industry is highly, highly regulated. Everyone associated with the business, even hands-off investors and professional service providers, all have to satisfy stringent legal requirements like residency and criminal background checks. Moreover, the industry faces an ongoing struggle to ensure continued legal compliance at all stages of the business, from the initial license application process itself to the required reporting mandates once the business is up and running. Full compliance with regulations at both the state and local levels, and legal vigilance in general, are critical in this high-growth industry.

Financial Challenges. Financing in the cannabis industry is particularly cumbersome. To take full advantage of the Green Rush, one needs to raise a lot of green currency. To open its doors, even a small dispensary can easily cost upwards of $250k. What accounts for the unique difficulties in getting financing for cannabis industry participants? Banks and other financial services fall under the regulations of federal banking laws. Under federal regulations, any activity related to cannabis is viewed as a criminal offense because the Federal Department of Justice views cannabis as a “Schedule One” drug under the U.S. Controlled Substances Act. As a result, there is an overly heavy balance of cash transactions in the cannabis industry.

This cash-reliance results in the burden of high surveillance, live security, and cumbersome record keeping. These facts unique to the cannabis industry have given birth to an array of new products and services, including (1) insurance coverage via surety bonds; (2) private marijuana banks to circumvent the restrictions of the federal banking system; (3) point-of-sale (POS) software for cannabis retailers; and (4) METRC [Marijuana Enforcement Tracking & Reporting Compliance], the track and trace reporting system allowing the state of California to monitor and trace every single cannabis plant along its entire life cycle, from seed to sale.

Societal Challenges. Although cannabis is increasingly legal in the U.S. and around the world [Canada is set to legalize the recreational use of cannabis on July 1 of this year], it nonetheless does not mean that the social stigma against it has disappeared. This is yet another hurdle in the market, particularly with respect to local regulations and zoning. Community outreach and public relations, and an effective use of social media, then become increasingly necessary. A particularly illustrative example of the effective use of social media to shape community perception involves the “cannabis culinary scene” and the “cannabis foodie movement.” In response to this societal push, the California Bureau of Cannabis Control (BCC) now mandates cannabis event licensing to throw a marijuana-friendly event. Want to throw a 420 party? Apply for a temporary (one-time) cannabis event license, plus a cannabis event organizer license. So in the near future, expect the dawn of a unique and elevated Amsterdam-style café experience in the state of California.

Security Challenges. Lastly, participants in the cannabis industry have to deal with significant security concerns. When thousands of dollars of your cash or product can easily be stuffed into a pocket, you’ve got to be on the constant lookout for theft. The theft potential here is both internal in, and external to, the business. Heavy-duty security and surveillance systems are necessary both to stay afloat financially and to stay compliant with the law.

So, while the challenges for a potential participant in the cannabis industry are great, so are the rewards. Strict legal compliance with all regulations, remaining on the right side of the law is the only way to remain viable and competitive. As one catchy sticker reads: “Non-Compliance = Death.” This makes expert and competent counsel for business participants in all facets of the cannabis industry not only good business practice but mandatory and essential for one’s success and survival.

Armin Callo, of Indio, is an attorney with cannabis-specific expertise and an active member of the California State Bar. He advises, and advocates for, participants of the cannabis market to move the industry towards a lawful, regulated, safe, and transparent industry beneficial for consumers, producers, and society alike. acallo@dc.rr.com.

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