Too many rules and black-market rivals could stifle California’s pot industry, experts say

Recreational weed is now legal in California. So what does that mean?

In January 2018, state and local authorities will begin issuing licenses for the sale of legal recreational marijuana. But what do you need to know before you rush to the dispensary? Information courtesy of Ballotpedia.com.
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In January 2018, state and local authorities will begin issuing licenses for the sale of legal recreational marijuana. But what do you need to know before you rush to the dispensary? Information courtesy of Ballotpedia.com.

Nearly 20,000 people, eager to profit as cannabis becomes legal in more places around the world, learned this week that tapping one of the biggest markets, California, will prove challenging due to the state’s legendary regulations and huge black market.

Investors, growers, regulators and others gathered for the country’s biggest marijuana business conference, MJBizCon, held by Marijuana Business Daily at the Las Vegas Convention Center. Attendance at the publication’s conferences has mushroomed, nearly doubling in the past year alone, organizers said.

The enthusiasm is the result of more states and countries legalizing cannabis. The biggest state to do so, California, will allow sales of recreational pot to adults 21 and over starting Jan. 1. However, it remains unclear exactly where consumers will be able to purchase adult-use marijuana, as local jurisdictions, including Sacramento, continue to craft their own regulations related to retail sales and delivery.

Before approving their own rules, many cities and counties had been waiting for the state to clarify its guidelines, which it did Thursday, releasing regulations for the nascent commercial market as well as updating those for medical marijuana.

The new regulations allow the state to begin issuing temporary licenses for growers, distributors and sellers at the beginning of the year. They offer specifics on the tracking and testing of marijuana as well as its packaging and potency. (Serving sizes for edible products, for example, cannot exceed 10 milligrams of THC, and there can be no more than 100 milligrams of THC in the entire package.) They also spell out the different licenses and fees, and give guidance in areas including inspection, enforcement and advertising.

The state’s decision not to enact a 1-acre cap on grow sites as previously expected created concern among many growers in the state.

The lack of limits on farm size could increase California’s existing problem of overproduction and put smaller growers at a disadvantage, said Hezekiah Allen of the California Growers Association. Already, industry and state regulators estimate that only one-sixth of the cannabis grown in California is consumed in the state, leading to questions about interstate drug trafficking.

State and local regulations will challenge the cannabis business, as will the ever-present threat that the federal government will resume enforcing national prohibitions on the drug, speakers said during the three-day conference that ended Friday.

“We fear the feds would like to make an example out of businesses in California,” said Graciela Castillo-Krings, a legislative aide to Gov. Jerry Brown, during a panel called “Tapping the New $4 Billion California Market.”

Fears about federal intervention – stoked by Attorney General Jeff Sessions’ negative remarks about pot – have limited investment from big companies, speakers said at other panels.

Conference participants from California said the more immediate concern is addressing the state’s complex landscape of local regulations. Proposition 64, which legalized recreational marijuana, gave local governments the authority to ban or regulate commercial marijuana production and sales. So far only a half-dozen or so areas have indicated a willingness to accept commercial sales, including places in the Bay Area, Southern California and the Sacramento region.

“California is a difficult state to do business in,” said Amanda Reiman, vice president of community relations for marijuana distributor Flow Kana. “I don’t want to understate how difficult it is is to sell marijuana in a state that over-regulates everything.”

Castillo-Krings of the governor’s office agreed. “There’s still very much a hesitance, and that it’s taboo,” she said.

As dispensaries establish records of legal sales, cities are likely to ease some of their regulations, panel participants said.

Morgan Paxhia, of San Francisco-based Poseidon Asset Management, said state and local taxes, which run as high as 45 percent, also threaten the market’s potential.

An-Chi Tsou, a California-based consultant, said new marijuana businesses can expect increased costs from local governments approving requirements for living wages and health insurance for workers.

Despite the cost of doing business in California, the sheer number of consumers makes the market irresistible to some.

Chris Leavy, co-chair and partner at MedMen, a Los Angeles-based private equity fund specializing in the marijuana business, said he expects the amount of legally sold pot in California to triple within a few years.

“One of the reasons we’re so bullish on the market is that demand is so high,” Leavy said after appearing on a panel about investment possibilities.

Nic Easley, who gave a presentation titled “Building a Profitable and Sustainable Cannabis Enterprise,” said he too is bullish on the California market – simply because of the state’s large population. He says he has more than 200 licenses for a variety of cannabis businesses in the state.

At the same time, Easley, CEO of 3C Consulting, said he is concerned about the black market. He said he can’t compete with growers who operate illegally because they can sell for less by not having to pay taxes.

In his talk “How to Develop a National Company in a State-Regulated Industry,” Pete Kadens told the audience that success in the ever-expanding pot business could come down to just trusting your instincts.

Kadens is CEO of Green Thumb Industries, an Illinois-based company with retail and cultivation sites nationwide, including in Carson City, Nev. GTI is not in California and for now has no plans to enter.

“There are already so many people with licenses and a huge black and gray market,” he said.

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