• Focus on New Jersey

    Focus on New Jersey

    The three states that make up the New York tri-state area, New York, New Jersey, and Connecticut, are all in the process of implementing adult-use cannabis laws. All have some kind of procedure that allows local authorities and municipalities to opt in or out of the licensing process and, as the OBEDIO data and analysis from THCregs.com clearly show, the enthusiasm for cannabis businesses at the municipal level has varied considerably from state to state. Of the three, the most positive responses so far have come in New Jersey, where around a third of the local governments have opted in, allowing at least the possibility of cultivation, processing, and/or retail businesses under their jurisdiction.

    Why So Many Opt-Ins In NJ?

    In some ways, that is surprising. People think of New York and Connecticut as more reliably liberal, Democratic controlled states which should, according to conventional wisdom, make them more open to recreational use than New Jersey. So, why would New Jersey be more receptive to adult-use cannabis? There are two probable reasons.

    First, the demographics of the state as compared to the other two. New York, and to a lesser extent Connecticut, have populations largely concentrated in a few big urban areas, with many rural, conservative municipalities. New Jersey, by contrast, has a more even spread of population, making for numerically more jurisdictions that are not completely closed to the idea of cannabis from the outset. The state also has a history of seeking alternative tax revenue in order to keep income taxes lower. They were, for example, one of the earliest adopters of legal online sports betting.

    That openness and proven propensity to tax vice, makes the second factor all that much more powerful. There is hard evidence that the cannabis industry can be beneficial to communities in terms of tax revenue, while not in and of itself resulting in increases in crime or other problems.

    The first legalization and regulation of medical marijuana came in California in 1996 and, as you might expect with such a controversial subject, there has been a lot of research done on the impacts in the intervening 25 years or so. Mostly it, and subsequent more recent research around the legalization of cannabis for recreational use, has shown that crime is little impacted, if anything maybe decreasing slightly, and that there are benefits for previously disadvantaged communities. However, if local politics are dominated by a sense that the given locality is too upmarket to embrace marijuana, none of that matters, regardless of the potential tax revenue.

    NJ’s Marijuana Tax Structure

    That potential tax revenue is substantial. Estimates of the potential revenue to the state of NJ from pot vary, but most settle somewhere around $150 million annually, roughly the midpoint of the estimate by Rutgers University. There are a couple of things about the New Jersey tax structure for marijuana that are interesting.

    Sales of recreational marijuana will be taxed under the general sales tax, but with an added excise fee. That fee has been structured in a way that seems counterintuitive in some ways but is actually designed with a specific goal in mind. It is a regressive tax in a way, that is structured as:

    • up to $10 per ounce if the average retail price of an ounce was $350 or more.

    • up to $30 per ounce if the average retail price of an ounce was less than $350 but at least $250.

    • up to $40 per ounce if the average retail price of an ounce was less than $250 but at least $200; and

    • up to $60 per ounce if the average retail price of an ounce was less than $200.

    The idea here is to keep total retail costs in check and ensure that legal, regulated marijuana stays competitive with the illegal market, a goal in New Jersey that dates back to the days when just medical pot was legal. To that end, NJ Health’s Division of Medicinal Marijuana releases a biennial report. The latest version of that report deals with 2017 and 2018, and tracks prices relative to crowd-sourced estimates of the going rate in the illegal market, from various possibly questionable sites. That report showed that while the average price of regulated, quality-controlled medicinal marijuana was higher than of illegal weed, that difference was largely due to taxes. The above tax structure was designed to alleviate that problem to some extent.

    In addition to sales taxes and excise fees, local authorities in NJ are permitted to charge a tax of 2% or less on each transaction, but that applies to each phase of the business. Thus, municipalities can charge 2% tax on cultivation revenues, then another 2% on processing, then 1% on distribution by a wholesaler, and finally 2% on retail sales. That leads to “tax pyramiding”, which upsets The Tax Foundation, whose research I have used above, but makes the business much more appealing to local governments.

    Impacts on Investment Opportunities

    In some ways, the relatively enthusiastic response to legalization of marijuana from NJ towns and cities make the state a good target for investment. Municipalities that have actively opted in to permitting are less likely to introduce obstacles to successful businesses at the planning, zoning, and local permitting level, which is obviously a plus. If we assume that the opt-ins also reflect positivity towards adult use establishments among the NJ population, that should also result in strong demand within the state.

    There are, however, a few downsides to NJ from an investment perspective.

    The aim of keeping legal weed at least competitive with the illegal market is a noble one, but it may well lead to disadvantages for NJ pot businesses, particularly at the retail level. If prices diverge despite the tax system, then a “logical” way to address the difference would be through outright price controls. If it did come to that, it would mean that should there be a local supply problem due to a weather event or whatever, retail prices might be capped, leading to a margin squeeze for outlets.

    It might not even need an unusual event for prices to be squeezed. The NJ regs limit the number of cultivator licenses to 37 for at least a year or two, meaning that supply will be limited. There is no cap on the number of microbusinesses that can be allowed, but the relatively small limit to their canopy means that they will probably only be an attractive business proposition if prices are already high. You don’t need a Yale economics degree to know that if, as the OBEDIO data suggest, demand in NJ will be quite high and if, as the effective production caps suggest, supply will be restricted, wholesale prices will climb.

    That in itself is not a problem, but history suggests that it may lead to a push for regulators to intervene, which would probably severely disadvantage retail businesses in the state.

    Recent criticism of high prices for medical marijuana led to a state response that said in part “Unfortunately New Jersey is not a price regulated state.” The use of the word “unfortunately” there tells you a lot. However, economic history shows that price regulation leads to harmful distortions of almost any market, no matter how well intentioned. To avoid temptation in the future it may therefore be a good idea for regulators to look at restricting the opportunity to implement price controls now, before a situation arises.

    In addition, the number of opt-ins make it likely that there will be plenty of businesses in NJ, with a wide geographic spread. Good for NJ residents, but not necessarily for retail businesses from a competition perspective. Here, regulators should pay close attention to the competitive environment if they want the businesses to survive and thrive.

    Conclusions

    Unsurprisingly given the state’s demographics and history and the significant potential tax revenues, New Jersey municipalities have embraced marijuana legalization more enthusiastically than have some of their near neighbors. That makes it an appealing state for investors, but the tax structure and stated aims of the state legislature make it seem at this point as if the cultivation, processing, and wholesaling businesses may be more tempting targets for investment than retail. 

  • Spotlight on Cannabis in… Connecticut

    Spotlight on Cannabis in… Connecticut

    Last year, Connecticut passed a law that made possession and consumption of marijuana legal from July 1st 2021 and which paved the way for the legal cultivation, processing, distribution and retail of the drug for adult use. Those that expected that by now, almost eight months later, those businesses would be underway, however, will have been disappointed. Progress towards that is slow. That has often been the case with adult-use cannabis legislation that has passed recently, but there are a few things about the law and regulations in Connecticut and the nature of the state that will make it even slower than elsewhere.

    The Moratorium Option

    Unlike in New York, where failure to opt out of the licensing process by a set date (December 31st 2021) meant that municipalities were automatically opted in, the Connecticut legislation allowed for them to essentially delay a decision by invoking a moratorium on license applications and the approval process. That has so far proven significant, as the OBEDIO data and analysis by THCREGS.com clearly shows. Up until the time of writing, 22 towns and cities have taken that option, as opposed to 20 that have opted out, and 11 that have actively embraced the opportunity.

    That shouldn’t come as too much of a surprise. Maybe I am just a cynic, but it seems to me that if you give a politician an opportunity to kick the can down the road on a controversial decision, most of them will take it. That inevitability, however, doesn’t detract from the importance of the idea of a moratorium for potential investors. The popularity of the option means that there will be a significant number of locations where, while retail stores and other businesses won’t be opening soon, there is still the possibility that they will at some point. It is important to factor that in when looking at the opt in/out data.

    It remains to be seen how many of those delaying will eventually allow marijuana businesses but, if they make their eventual decision based on data rather than on opinions, there is a good chance that it will be the majority of them. The studies that have been done so far, including the Federally funded one referenced here along with research by the Cato Institute and RAND, show little or no impact on property or violent crime rates following legalization or, in some cases, a reduction in those crimes.

    However long it takes, though, and whatever the total of eventual opt-ins, the demographics of the state make it likely that the rollout will be successful, if geographically uneven.

    Connecticut Demographics

    When most outsiders think of Connecticut, they think of what those of us who live here often refer to as the ‘Gold Coast’, towns like Greenwich, Westport, and Darien close to the New York border that are populated largely by Wall Street refugees and high earning commuters to the big city. That, though, is only a tiny part of a quite economically diverse state that also includes large rural areas and some quite poor, post-industrial towns.

    According to a survey released by the census bureau in 2018, at that time median household incomes by town in Connecticut ranged from around $200,000 in those Gold Coast towns to well under $50,000 in other parts of the state. One might think that legalization and the attendant economic opportunities would be more rapidly embraced by those poorer parts of the state but so far, that isn’t necessarily the case. Of the three Connecticut municipalities with the lowest median incomes, Hartford, New London, and New Haven, only Hartford has already opted in. That is despite the fact that the legislation allows them and other targeted towns significant advantages in the licensing and approval process.

    Priority Towns

    35 towns and cities in Connecticut, including the three mentioned above, have been designated priority areas for cannabis licenses and will be given earlier consideration and approval, allowing them a head start. The priority status was awarded to areas that had been disproportionately affected by the prohibition of cannabis in the past, defined as those with “…either a historical conviction rate for drug-related offenses greater than one-tenth, or an unemployment rate greater than ten percent, as determined annually by the Social Equity Council.”

    It would seem logical that, priority status or not, municipalities that fit that description would be keen to start the licensing process early, if for no other reason than to start getting the 3% tax that local authorities are allowed by the act to levy on cannabis sales, but that hasn’t been the case. So far, only six of the priority towns have opted in, with two having opted out and the rest yet to decide. For potential investors, though, priority towns should be just that…a priority, as anything that streamlines applications and approvals in a regulated market is welcome.

    What Next?

    Retail sales of cannabis are scheduled to begin in Connecticut on July 1st, 2022. However, without a fixed deadline for municipalities to opt in or out and with the option of a moratorium available to those that do address the issue, it is likely that even then, the scale and scope of the market in the state will be unclear. It would be helpful if authorities could force the issue somewhat by creating a deadline, after which an opt-in would be assumed, but I have not seen any mention of that to date.

    Even if they do, of course, there will still be zoning issues to be negotiated. Local authorities have the right to set zoning rules and restrictions around the cannabis industry and, if the history of legalization so far is to be trusted, they will enthusiastically embrace that right. There are some statewide rules relating to the proximity to schools, churches and the like but, as with all states, there is a risk that as the comment process gets underway, local groups will ask for additional restrictions.

    Still, even with those potential problems, the cannabis market in Connecticut will probably turn out to be a decent one. It is a generally prosperous state with enough municipalities incentivized and willing to embrace the industry to take advantage of the inherent demand. Progress will be slow, but it will be progress, nonetheless.

  • Spotlight on Cannabis in… New York

    Spotlight on Cannabis in… New York

    Martin Tillier has nearly forty years of experience in and around financial markets. He started in the London interbank forex market, then worked in dealing rooms in Tokyo, Warsaw, and Moscow before moving to the States, where he focuses on analysis rather than trading. Martin now lives in Connecticut and writes a daily market commentary for Nasdaq.com.

    New York Cannabis Market Analysis

    By Martin Tillier

    When New York passed its adult-use cannabis legislation in 2021, the state allowed a period of time for municipalities to pass local laws regarding the adoption of retail outlets and/or consumption lounges. They basically had three options. They could opt in, opt out, or do nothing, in which case they would be assumed to have opted in. That time expired on December 31st 2021, so we now have the data on which municipalities did what. It makes interesting reading and, in some ways, seems like fairly good news for the cannabis industry in the state.There are, however, some things that must be borne in mind that could present as issues over the next few months.

    The Numbers

    At first glance, the numbers at the deadline are not that encouraging. Sourced from OBEDIO data and analytics by thcregs.com, only 33 of New York’s 1500+ jurisdictions actively opted in, with 708 passing local laws banning cannabis businesses. However, 767, or 50.1% of municipalities, took no action, meaning that they will be opted in by default. That brings the total of effective opt-ins to 800, representing 52.25% of the total.

    Even that, though, underestimates the potential of the New York cannabis market in one way. The mean population of the 708 opt-outs was only 9,220 versus 25,618 for those that actively opted in, and 29,318 for those opted in by default. It appears that, as you might expect, the majority of opt-outs came from small, rural towns, while the major population centers in the state are on board with the idea.

    The Existing Legislation

    The Marijuana Regulation and Taxation Act (MRTA) came into effect on March 31st 2021, legalizing the use of cannabis by adults in New York state. The act largely devolves the decision making about the licensing process to the newly created Office of Cannabis Management (OCM). The OCM will devise, issue and adopt the regulations around the cultivation, processing, shipping and retail sale of cannabis and, as of now, the exact nature of those regulations and recommendations is unknown.

    What we do know, though, is that there will be some restrictions to the issuance of licenses. No person can own more than one license to cultivate, process or distribute the product, nor can they own more than three retail or on-site use licenses.

    That is an understandable attempt to avoid a monopolistic situation in the young market, and is similar to restrictions seen in other states that have passed adult-use laws. The problem is that as so often happens when governments try to regulate markets, while the intent is admirable, there are also unintended consequences. The intent is to have an industry made up of many small concerns, but that makes it less attractive for any licensee to plow profits back into their business. Still, as has already been proven elsewhere, such as in Massachusetts, even a forcibly fragmented marijuana market can grow rapidly given the level of demand, so that in itself is not a major obstacle to outside investment. 

    Timing

    The deadline has passed and we now know where everybody stands, but that doesn’t mean that cannabis businesses will be popping up in New York immediately. The OCM has yet to publish the regulations around implementation and then, once they do, they will start taking applications for licenses. Hopefully, those regulations will give some clarity as to the rules around where the businesses will be located. If they don’t there will be further delays as each jurisdiction will have to set its own rules and limitations.

    By creating the OCM and leaving much of the detailed regulation to them, the MRTA added a layer of bureaucracy that ensures that things will move quite slowly, and we don’t expect the first retail outlets to be opened until 2023.

    Possible Obstacles

    Even if the OCM does clarify the regulations regarding location, there may still be some additional holdups and obstacles as the law is actually implemented at the local level. They have issued guidelines for local authorities that ban them from retroactively denying or restricting licenses once opted in, whether by choice or default, but that those guidelines also say that localities are “…permitted to pass local laws and regulations governing the time, place and manner of adult-use retail dispensaries and on-site consumption licenses, provided such laws and regulations do not make the operation of the license unreasonably impracticable.”

    That could well lead to a series of local impact assessments and public hearings that will confuse the issue of location. The MRTA includes the usual restrictions on licenses granted for locations close to schools and churches but when local populations are consulted, there could be objections to proximity to parks, museums, libraries, or almost anything. Add in the right of the local governments to pass zoning laws and there are significant opportunities for opponents of the cannabis industry to create some serious roadblocks to implementation of the law at the local level.

    Applicant Approval Process

    On the positive side for the industry, the New York law is more streamlined than some of its precursors, in that it does not require municipalities to approve licensees or locations before submitting them to the state for approval, as most others do. However, applicants must notify the local authority of their application and intention to open a business, giving them at least 30 days notice of their intent to apply. It is not clear whether these notifications will be part of the public record or not, nor is there any indication that they would prompt any mandatory public meetings or other consultation processes. 

    We believe that they can, should, and will hold such meetings, however. There are public meeting requirements for other land use proposals, and exempting the new cannabis businesses from the standard practice would create problems. Allowing for consultation would also result in a greater degree of buy-in from local populations and minimize future protests and complaints.

    What’s Next?

    Clearly, even though the deadline for opting in or out has passed, New York is still some way from implementing its adult-use cannabis law. The next step will be for the OCM to write and publish their specific regulations and recommendations around implementation. It would be useful if those regulations could be quite specific in as many ways as possible, because a lack of clarity could easily result in drawn out litigation from both license applicants and local residents’ groups that would cause further, avoidable delays.  

    Once those regulations are published, it will be up to local governments to hold whatever hearings they deem necessary, then to issue zoning ordinances where they believe them to be needed or desirable. Those ordinances are important to the towns and cities, because they are their way of controlling how many locations exist under their jurisdiction. The fact that applications are made at the state level rather than local means that they could not do that in the normal way, by approving only a preset number of applicants. Zoning restrictions will give them back that power.

    Conclusions

    New York is now one step closer to having a viable, vibrant cannabis industry, but the process is really only just beginning. The OCM will now issue rules, the local authorities will consider zoning, and there will inevitably be fights and lawsuits that follow that. The simple fact, though, is that the vast majority of the population of New York are effectively opted in to the establishment of marijuana businesses and, whatever the problems, those businesses are coming.

  • The CARES Act is Fake News for State and Local Governments

    Local municipalities are losing money as COVID is cutting tax revenues and costs are increasing as residents require additional social support. Cities typically receive the bulk of revenue from sales taxes generated by local businesses and property taxes. Cities that rely heavily on local tourism are hit even harder.

    Local governments are scrambling to find relief either from the federal government or the state government in order to meet their balanced budget requirements. Without this money, cities must cut costs and find additional sources of income, a likely choice being the cannabis industry. Local cities need us to get the funding that they need. Without funding, the cannabis industry faces more taxes. Here is how you can help.

    The Federal CARES Act Does Not Care About Local Governments or the Cannabis Industry

    Local governments are suffering and formally requested $250 billion from the federal government to help them through this period. Only 171 counties municipalities are eligible to receive federal funds through the CARES Act. This leaves substantially all of the roughly 3,000 counties and 20,000 cities without federal money. The minuscule number of qualifying cities is due to the fact that the CARES Act will only provide money to counties or cities with more than 500,000 people, which equates to .0007% of the local municipalities in the United States.

    Even if a city qualifies, the money must be used for COVID related expenses and personnel. The CARES Act will not provide relief for lost tax revenue. This means that cities will feel pressure to cut costs in those areas that are not related to health care or policing such as legal, city planning, and other administrative areas that help cities support businesses and generate revenues.

    The federal government’s money is generated by these municipalities and its local residents. It belongs to the municipalities and is administered by the federal government. The decisions on how they are allocating our money will ultimately impact the cannabis industry’s growth due to fewer city personnel to draft regulations and allocate licenses. The National League of Cities states that a new report suggests that over a million people may be terminated from public sector jobs. The federal governments’ actions will also increase the operating costs for the cannabis business as jurisdictions may enact taxes for revenues.

    Over the past month, our data shows that more than twenty (20) cities started the process of adopting cannabis taxes, raising cannabis taxes, or reconsidering tax levels. This trend is sudden and reverses the course of local municipalities working with the industry to cut taxes. We expect this trend to continue unless either the state or federal government helps local governments replace lost revenue. Without a paycheck – no one can pay their bills.

    What is maddening is that there are no discussions of austerity measures at the federal level. The executive branch employs over 2 million people in its non-post office, non-defense administrative agencies. Recession-proof Washington DC looks to once again escape the COVID downturn as it did the Great Recession. At this point, who is more important employees to the US economy – the DC workers who cause friction in the economy – or the state and local workers who help businesses get up and running and generate revenue.

    The Federal Government should have announced an austerity process that would evaluate federal layoffs and cost-cutting measures in solidarity with state and local governments. Proof again that there is a lack of oversight of the allocation and effective spending of income tax dollars. This is even more evident as the states shoulder the response to and the responsibility for opening up the economy.

    State Governments “Have No Money”

    Multiple governors including Governor Cuomo publicly stated that states have not money. States also suffered severe revenue hits as unemployment hit record numbers, stay-at-home orders slashed sales taxes, and health care costs skyrocketed.

    The CARES Act will provide the states with money for costs directly related to COVID. However, the federal government will not provide states with any money to replace the lost revenue. Cites that are seeking money from state governments will be standing in line with small businesses, local citizens, and other stakeholders for a limited amount of relief.

    As states start mapping out the plan to restart the economy. States should consider what value the federal government has played in the past year and whether there should be a reallocation of income tax dollars from the federal coffers to the state coffers. States and its residents deserve accountability that our hard-earned money is being used effectively and efficiently as most of us are not born wealthy, work hard for our money and want to spend it wisely.

    The Next Steps

    COVID has revealed a lot of the broken processes in the United States. It has also made me realize how important state and local governments are to our economy, to our health, to our community, and to our future. We have been overpaying a federal government to perform administrative duties and oversight that do not help our local economies. The real people who do the work are those in the state and local governments that help us get the businesses up and running and advocate for new industries.

    We need to support these people to ensure the economy can restart as quickly as possible. What can we do instead of standing by and watching cities and states furlough over a million people who help our businesses? We can demand – that for once – that the federal government cull its administrative agencies and adopt austerity measures. ABC agencies are duplicative, they do not understand local nuances or businesses, and do not help to grow industries. It is time that the executive non-defense administrative agencies show their value.

    We should expect the “States-Rights” politicians to agree. We should expect the federal government to give back the municipalities money – not as a relief – but as what it truly is – the People’s Money. The People’s Money will be used to take care of our communities, restart our economies, and to innovate new industries. After COVID, we need to reassess what duties outside of defense the 2 million non-defense executive administrative federal employees should be performing and whether the cost-benefit analysis really pans out. I for one am truly bothered that Washington, DC remains recession-proof while the rest of the country lives in the real world. It is time for this to change.

  • California Cities Claim $30 Million Cannabis Investment Funds for Social Equity Participants


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    Sacramento, CA will provide $3.8 million in no-interest loans to participants in the Cannabis Opportunity Reinvestment and Equity (CORE) program to fund start-up costs for cannabis businesses. The city received the funds on April 21, 2020 from a $30 million Equity Cannabis Grant Program developed through the Governor’s office and the Bureau of Cannabis Control.

    Core participants or those who are eligible can receive up to $25,000 loan that can be used to pay for capital improvements, real estate, or regulatory expenses. The announcement of the loans is well-timed as the city is close to accepting applications for ten (10) new retail dispensary licenses that will only be available to CORE participants. The city will make five (5) of the licenses available in 2020 and an additional five (5) licenses available in 2021.

    Sacramento’s city council met on May 5, 2020 to review the license permitting process, zoning, and eligibility requirements for CORE participants. Sacramento will require CORE participants that receive a retail store license to retail 51% ownership and 51% profit sharing in the entity for 10 years. These limitations are designed to deter flipping of retail store licenses to non-CORE entities.

    Sacramento is one of 16 local jurisdictions that received funding from the state’s Cannabis Equity Grant Program. Seven jurisdictions including Oakland, Los Angeles, San Francisco, San Francisco, Long Beach, Humboldt County, and Mendocino County received almost $29 million dollars to provide investment funding to social equity participants.

    California also provided an additional $1 million in grant funds to nine (9) additional municipalities for use in building social equity programs. These municipalities include Lake County, Monterey County, Nevada County, Palm Springs, San Jose, Santa Cruz, Clearlake, Coachella and Stockton

    In addition to Sacramento, other cities that are receiving funds are gearing up to issue licenses to social equity participants including San Jose and Los Angeles. The newly developed social equity programs will be tested as challenges to the process are already being raised in Los Angeles. Sacramento and San Jose should review the lessons learned to avoid similar issues.

  • Florida’s Administration Unites Against Marijuana During Supreme Court Arguments


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    The Florida Supreme Court held oral arguments yesterday on two significant cases involving marijuana. The court heard arguments relating to a request by the Attorney General on whether an adult-use ballot initiative met the state’s legal requirements as well as the continuation of the Florigrown lawsuit against the Department of Health challenging the state’s license caps and the vertical integration market structure.

    Florida’s administration including the Attorney General, the Governor, the House, and the Senate showed up in force to fight these two cases. The Supreme Court’s decisions will define the constitutional role of marijuana in the state and the ability of the state to regulate the industry. These cases point out the complexity of citizen-initiated ballot measures to amend state constitutions, especially with topics like marijuana that pose safety and health risks to citizens.

    The united front displayed by Florida’s administration suggests that the state is trying to get control of the marijuana issue. Marijuana has been a loose cannon in Florida with allegations of favoritism in the distribution of licenses and the subsequent sale of these licenses at astronomical prices. The Supreme Court’s decision on these two cases will help the industry understand the path forward for future growth including the legalization of adult-use marijuana.

    Make it Legal Florida Adult Use Ballot Initiative

    The State’s Attorney General and the State Senate asked that the Supreme Court to stop the Adult-Use of Marijuana ballot petition that was filed by Make It Legal Florida using two separate arguments.

    First, the Attorney General petitioned the court to provide an advisory opinion that it Make it Legal Florida’s initiative failed the technical requirements for it to move forward. The main argument is that the 75-word summary of the ballot initiative will mislead voters into believing that the use or purchase of marijuana would be legal, when in fact, it is still illegal under federal law.

    The State Senate piled on by filing a Motion to Dismiss claiming that the ballot initiative failed the signature threshold requirements. In the Motion, it was noted that Make It Legal announced on January 13, 2020 that the initiative would be placed on a ballot in 2022, which creates uncertainty as to whether the petition meets the signature certification requirements. This technical argument is loaded with issues that will impact future ballot initiatives.

    Florida Department of Health, Etc., et. al. v. Florigrown, LLC, et. al.

    In the Florigrown case, the Governor, the State House, and Florigrown asked the Supreme Court to address whether the state’s regulations are constitutional. The answer will depend on how the court interprets the use of the word “or” versus the word “and “ in certain medical marijuana regulations. The attorney representing the Governor’s office, Joe Jacquot, indicated during the oral arguments that the state would like the court’s decision in order to prevent future litigation around this issue. The state’s confidence on this issue makes it appear that they expect a favorable answer.

    Marijuana litigation related to legalization and license allocations has become the norm. The question is whether state and local governments will soon succumb to litigation fatigue and focus on more pressing matters than legalizing the industry. At some point, litigation costs become more costly than the economic benefit that the industry provides. The industry should start self-policing when and where it is appropriate to challenge these regulatory decisions.

  • Cannabis Delivery by Bike, Motorcycle, or Cargo Van? New Legislation Says Yes


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    Covid-19 has impacted the cannabis industry in significant ways. It was great that the state governments designated the cannabis industry as an essential service. It was a disgrace that the cannabis industry has been left out of federal small business relief. It is yet to be seen how Covid-19 guidance will impact the industry’s structure and ultimate market strategy, especially for retail stores.

    Covid-19 social distancing guidance limits the number of consumers in a store, which ultimately impacts sales. Due to this shift, retailers may turn to delivery services to expand consumer reach and increase revenues. California’s Assembly is moving bill AB-2482 forward to help level the competitive playing field between the legal and illicit markets for delivery services.

    Delivery operations account for 75% of the illicit market retailers. In the licensed market, there are over 300 licensed non-storefront retailers. Three cities in Northern California account for over 65% of them including Oakland (121), Sacramento (51), and San Franciso (24). Delivery operators may only carry products for one retailer at a time, and they must start from, and go back to, the original destination on the same day.

    The deregulatory legislation arms the legal market with additional ways to interact with the 54% of California consumers that receive cannabis from a delivery source. The bill expands the modes of transportation that a delivery service can use, raises the value of inventory that can be carried, and aligns the security burdens with these choices.

    The existing law requires businesses to deliver products in an enclosed vehicle. Under the legislation, businesses can use bicycles, motorcycles / scooters, and cargo vans. This allows businesses to choose the most efficient and cost-effective method of delivering cannabis products to consumers. Inventory transport caps will also vary based on the delivery method that is used.

    The current $5,000 carrying cap for cannabis products will be replaced by a tiered structure. An employee who uses a bicycle may carry only $500 goods whereas employees who use a cargo van can carry up to $50,000 in products. The amount of cannabis that can be carried in a car will increase to $20,000, which is closer to the typical $25,000 inventory carried by the illicit delivery services.

    Finally, the legislation requires California’s regulators to work with the Department of the California Highway Patrol to develop safety standards for each value tier. The safety standards referenced in the bill are those that in use today to ensure the safety and security of the delivery including lockboxes, employee verification, and customer verification processes.

    California’s legislation is a move in the right direction. Licensed operators need to be flexible and change their business strategy as the cannabis market transforms as a result of the Covid-19 pandemic. Now is the time for regulators to think outside of the box and provide relief from challenges that arise. This is a time when state and local governments need to retain market share, not only for the badly needed tax revenues but to show the illicit market that the competitive threat from the licensed market is real and growing in strength.

  • What Can We Learn From CannTrust? A LOT


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    CannTrust Holdings Inc. (NYSE: CTST) had a really bad week. The New York Stock Exchange and the Toronto Stock Exchange stopped trading the security on the morning of March 31, 2020 when the company announced that it filed for bankruptcy protection and looks to be throwing in the towel as a public company. CannTrust may no longer try to fix its public disclosure statements by filing additional reports as required under the Canadian and US securities laws.

    The bankruptcy filing was the end result of a downward spiral that started in July 2019 when regulators found unlicensed grow rooms and that CannTrust provided them with false and misleading information. Within five (5) days, CannTrust’s stock dropped 48% and the company lost over $174 million in market value. Shareholders quickly filed a class-action lawsuit on July 10, 2019 alleging that the company failed to disclose to investors that it was growing cannabis without regulatory approval and that it did not comply with regulatory requirements.

    On August 8, 2019, the NYSE flagged CannTrust as deficient for failing to file audited financials in a timely manner. CannTrust last submitted financials to the securities regulators on March 30, 2019. To date, those are the last financials available. CannTrust suggests that it will go private as it “does not intend to devote additional time or money towards curing its public disclosure defaults by completing and resuming the filing of required reports under Canadian and United States securities laws.” CannTrust closed its last day of trading at $0.638 which is far lower than the $7.47 price that it was trading in July 2019.

    What accelerated CannTrust’s decline:

    The most critical aspect of CannTrust’s fall was Health Canada’s decision not to reinstate the licenses needed by CannTrust to generate revenue. CannTrust’s recent announcement shows that the company is still remediating issues related to its Vaughan Facility and it is addressing other compliance matters.

    Regulatory approval is needed to stay in business and to continue growing. Losing credibility with a regulator has long term implications for creditors and shareholders. Once a regulator questions your credibility, this provides shareholders with the right to question all of a company’s disclosures.

    The second downfall for CannTrust was the shareholder class action. There has been an increase in shareholder class actions in the cannabis industry over the last year. The claims against CannTrust are different in that shareholders allege that they had a right to know that the company was cultivating cannabis without a license. CannTrust really has no defense to this allegation since Canada Health agreed that it happened.

    The final accelerant was the failure to promptly perform an internal investigation and issue restated financials. Without the mea culpa, a company’s credibility is questioned from all sides including shareholders, creditors, vendors, and regulators. Each day that passes erodes the goodwill and reputation that a company built over time. This is evident in that CannTrust is filing for creditor protection even though it still has $145 million in cash.

    What lessons can be learned from CannTrust?

    Businesses should take away the basic fact that the regulator can make or take your business. A regulatory investigation or formal action is a serious matter. When a regulator finds an issue, companies should act quickly to investigate, understand weaknesses, remediate with vigor, and acknowledge the issue.

    What are some of the basic ways that public companies handle these types of situations?

    1) Perform an internal investigation. If a regulator opens an inquiry or shuts down your business, hire an independent third party that has the expertise and knowledge to identify how, when and why the incident occurred. An independent director or committee should be in charge of the investigation and the final work product. Use the report to fix internal weaknesses and to adopt processes that will prevent further problems.

    2) Supervisory accountability. Management and supervisors control their employees. Supervisors should be held accountable for their employee’s actions, which can include suspensions or termination. Supervisors and employees must understand that violating regulations or fudging disclosures hurt shareholders and are firing offenses.

    3) Review the governance structure. Everyone needs a boss including the CEO. The board of directors is charged with protecting investor interests by being fully engaged and keeping an eye on the big picture. The board must monitor high-risk areas such as financial reporting and regulatory compliance for anomalies or other warning signs. By including independent board members, a company can demonstrate to investors that it values a fresh eye on the company to ensure that it has adequate controls and a culture of compliance.

    4) Create a culture of compliance. A culture of compliance is worth its weight in gold. Culture can help a company mitigate the risk associated with internal threats posed by employees. Employees must be supervised and trained on the risks facing the company and how the employee’s actions can either exacerbate or mitigate this risk. A rogue senior management team can cause fast and loose practices to leach through an organization leading to the failures witnessed at CannTrust. Investors want a culture of compliance that will protect their investment.

    5) Test, test, test. Companies must test operating procedures and controls to make sure they work. Operating procedures are designed to instruct employees on how the business is operated in a way that mitigates risk. By reducing risk, a company can ensure it maintains the value of its inventory and services and provides trustworthy financial statements. Companies that periodically test the controls and processes that are used in the operating procedures can demonstrate their effectiveness of the control framework to the board of directors and regulators.

  • Washington State To Shut Down Businesses that Violate COVID-19 Order


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    The Washington State Liquor and Cannabis Board adopted emergency rules on April 6, 2020 that allows WSLCB staff to immediately shut down a business that violates the state’s COVID-19 requirements. The rules also provide a framework for licensees to appeal the decision and obtain a stay of the staff’s decision.

    Under the COVID-19 proclamation, cannabis is deemed to be an essential service. The WSLCB issued an FAQ that outlines the social distancing requirements and permits curbside delivery. Businesses that change floor plans or other infrastructure to enforce social distancing must submit the changes to the regulator. Businesses must also notify the regulator about additional cash investments.

    The new rule allows WSLCB staff to shut down a business if they determine that a licensed business violated Governor Inslee’s COVID-19 proclamation so long the closure is necessary for the public’s health, safety and protection.

    A licensed business must shut down within twenty-four hours after personal receipt of the summary suspension unless the business immediately complies with the COVID-19 proclamation. Licensees may also file an appeal with the WLCB to stay the order so long as it is done within 10 days.

    The state’s new emergency rule structure has significant ramifications for failing to comply with the state’s rules. Given the ease of shutting down a licensee, Washington cannabis businesses should review their processes and train employees on the measures to be taken for COVID-19 compliance.

  • Save the Massachusetts Marijuana Industry: Obtain a Medical Marijuana Card Now!

     


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    Massachusetts’ Cannabis Control Commission amended the cease-and-desist order yesterday to permit the limited operation of adult-use marijuana businesses that are essential to the medical-marijuana supply chain. The amended order was released after Governor Baker, a Republican, extended the stay-at-home emergency order through May 4, 2020. A surge in new medical marijuana registrations in the state shows that consumers are finding a way around the state’s adult-use store closures.

    The CCC noted that it received 1,308 new patient applications, which is a 158% increase since the state shut down adult-use marijuana businesses on March 23, 2020. State regulators expect these numbers to increase in the near future as patients can easily use telehealth medicine to qualify.

    The amended order permits adult-use marijuana businesses to operate that are either co-located with a medical dispensary or are essential to the medical supply chain. State records show that the inventory of a medical dispensary is heavily supported by adult-use products including 66% of the finished flower product, 40% of the concentrate products and 63% of the marijuana-infused products.

    A business, and its employees, qualify for the essential status if they cultivate and manufacture marijuana and marijuana products that supply medical dispensaries. The CCC is expanding the network of essential marijuana services due to the expected increase in new patient registrations and the ability for patients to use telehealth medicine to qualify.

    The amended cease-and-desist order still requires adult-use retail stores to remain closed until the expiration of the stay-at-home emergency order. The increase in new medical applications clearly represents consumers that previously purchased products from adult-use stores.

    Owners of adult-use retail establishments protested Governor Baker’s decision to punish the industry by failing to designate it as an essential service. This decision places an unnecessary financial strain on the adult-use market and could devastate small mom and pop shops that are not eligible for federal assistance.

    Although the new ruling does little to help adult-use retail, it will help a number of cultivation and manufacturing facilities generate revenues during this period. Massachusetts residents should show the Governor how his ruling is a farce by mass registering for medical marijuana cards. Medical marijuana stores could share this windfall with their adult-use brethren to make sure that the industry remains strong and united. So people, dial for the industry and register as a medical marijuana patient.