Top Ten Problems with Recreational Marijuana

Baby marijuana plants

1) Banking

Marijuana businesses have always had a hard time doing banking in that banks are Federally-chartered institutions. Neither checking accounts nor debit or credit accounts are permitted, in theory anyway.

However, it appears there is good news on the way. In early 2014, U.S. Attorney General Eric Holder announced that the Justice and Treasury departments were jointly working on ways for banks to work with the marijuana industry.

Furthermore, the industry actually has been using debit cards for some time, and many establishments are now accepting even credit cards.

2) Taxation

The big bear in the room has always been U.S. Code 280E, which reads:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substance Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Marijuana is still a schedule I controlled substance under Federal law. The IRS/CHAMP case of 2007 provides some relieve for marijuana businesses, but see a professional.

3) Capital Formation

It takes money to make money.

Access to capital is essential for any business start-up. Until recently most marijuana entrepreneurs relied on friends and family to fund their operations until they reached breakeven.

Equity crowdfunding funding portals now allow start-ups and small businesses to raise money under SEC Rule 506(c in ways not possible before September 23, 2013—for the first time in over 80 years.

Online sites and funding portals have started to lend money to marijuana businesses and to negotiate equity investments.

Most private investments were targeted to ancillary-only businesses prior to the Cole Memo. That is changing. Money can be found for direct investments.

No SBA loans are available.

There are several angel funds that recently entered the sector.

4) Regulations

Recreational marijuana is highly regulated. Paperwork and compliance burdens should not be under-estimated and have kept many players out of the game. This reason alone may keep one in the ancillary sector.

5) Local governance

Any municipality can enact a moratorium on any marijuana business anytime it wants. Over 100 towns in Massachusetts alone passed anti-marijuana moratoriums just in 2013.

States with a track record of successfully regulated medical and recreational marijuana offer better opportunities for avoiding moratorium issues. It helps to remember that, of the twenty-one states with medical marijuana laws, only twelve allow dispensaries. The other nine states either already allow caretaker rowing and patient growing and/or are in the process of starting a dispensary system.

Here are the states with existing dispensaries:

  • Arizona
  • California
  • Colorado
  • District of Columbia
  • Maine
  • New Jersey
  • New Mexico
  • Rhode Island
  • Vermont

Here are the states that have passed legislation for dispensaries but where they are not yet operating:

  • Connecticut
  • Delaware
  • Illinois
  • Massachusetts
  • Nevada
  • New Hampshire

Here are the states that have dispensaries operating but that are not yet recognized by the states:

  • Michigan
  • Montana
  • Oregon
  • Washington state

6) Human resources

In many part of the country, “marijuana” is not a word most job candidates feature on their resume. While you can train a bud-tender in a few hours, marketing professionals and others are not immediately eager to have a “dope” association.

Some really good news is that this negative perception is finally and firmly changing. There have been any number of clinical trials pointing to the health benefits of some applications of cannabis to a number of ailments, and the fast-growing edible market has far less “stoned” association.

7) Prices

Some blame high retain prices on gouging but that is not the case in many stores. Instead, prices are driven by production, competition, and taxation in that order, together with escalating rents in some cases.

8) Late to the party

Colorado is the most obvious example of this concern in mid-2014. No one outside the licensed pool of medical marijuana dispensaries can even apply for a retail license

in Colorado until October 2014, making any opening date a full year after the recreational shops started opening.

Having said that, we really are at the beginning of end of prohibition of marijuana with all the opportunities that will come with it.

9) The black market

The only real competition to licensed marijuana sales is the black market. One study from the state of Washington in 2013 concluded that the licensed sector of the industry will only get one in five purchasers; the others will continue to buy from their traditional sources.

Traditional or black market sources often offer convenience of delivery with hours that can be tailored to the customer. Taxes, safety, testing, seed-to-sale tracking, state approved packaging—these are expenses of licensed outlets that the black market, traditional source does not have to pay.

Here are talking points for why a purchaser should come to a licensed retailer:

  • Lab-tested quality of product
  • Wide range of products
  • Hard to find strains, edibles and CBD products
  • Paraphernalia offered in one place
  • No laws are being broken

10) Security

Marijuana-related crimes continue to rise due to the cash nature of the business as well as the resale-ability of the products that can be stolen. Security costs can be higher than you anticipate. Remember that is it almost never a good idea to have a gun on the premises. If you employ an armed security guard and the Federal government happens to raid your premises, you may face severe consequences.

About Douglas Slain

Doug received a JD from Stanford Law School, a MA from the University of Chicago, and a BA from DePauw University (Phi Beta Kappa). After practicing real estate and finance law at then Pillsbury, Madison & Sutro, he founded four national monthly law reporting titles now owned by Thomson-Reuters. He served two consecutive terms as chairman of the American Bar Association’s General Practice section’s Professional Responsibility Committee. Slain was an ABA-appointed rule of law consultant to the Ministry of Economy for the Republic of Latvia as its secured transactions adviser. He taught briefly at Stanford Law School as an adjunct clinical law professor. Slain has been the managing partner of Private Placement Advisors since August 2009. In January 2013 he founded Outliers Network.

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