While opportunity abounds in the cannabis industry, those looking to get involved must proceed with a clear understanding of the initial hurdles they will likely face and be well-prepared to adapt to ever-changing regulations. Michael Rosenblum, corporate attorney at Thompson Coburn LLP; Adam Spiker, executive director for the Southern California Coalition; and Paul Lessard, president and chief scientist at Delta9 Labs, shared their top takeaways for professional cannabis hopefuls in “The Pot Thickens: Building a Successful Cannabis Business in California,” an Oct. 11 webinar presented by RoseRyan, a finance and accounting firm based in Silicon Valley, and hosted by Chris Vane (pictured left), the company's Director of Business Development.
From Michael Rosenblum, Corporate Attorney at Thompson Coburn LLP
1. Be aware of the current regulatory landscape and the challenges it presents.
Rosenblum (pictured left) outlined the federal, state and local regulations in place that cannabis business owners must be mindful of.
The federal regulations, he said, are primarily governed by the Cole Memo that says the federal government should employ a “hands off” policy for legal cannabis businesses in states with regulatory programs in place. The Memo is not law, Rosenblum said, but acts as guidance, and it is uncertain if prior attitudes about the Cole Memo will remain intact under the Trump administration. He said there are current court cases and efforts to re-schedule cannabis under the Controlled Substances Act, but a change in federal regulations is likely the only route to alter the law.
Rosenblum also pointed out ongoing banking issues that force cannabis businesses to use credit unions and cash because many federally regulated banks are unwilling to serve them.
Looking at California’s state regulations, Rosenblum explained that the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA) has combined the state’s medical and adult-use regulations to create one regulatory framework. MAUCRSA allows vertical integration and lets for-profit entities exist in the cannabis space among other things, Rosenblum said.
From a local standpoint, Rosenblum said regulations for Prop. M are currently being drafted in Los Angeles and will regulate the commercial cannabis industry going forward.
2. Think like an investor when looking for financing.
Rosenblum said businesses seeking financing should recognize trends in the market and understand what an investor is looking for. He said the market is trending toward equity over debt, and 70 percent of cannabis deals are now equity deals instead of debt deals. The industry is also maturing and making it easier for investors to valuate companies using many of the same metrics used in other industries.
Rosenblum said there is an oversaturation of new cannabis companies on the market, and businesses need to differentiate themselves, especially as cannabis prices continue to drop. He said entrepreneurs should figure out what problem they are solving with their product or service, how they are different from the competition in solving that problem and how that can be monetized.
Licensing and compliance is critical to investors, Rosenblum said, and red flags for them relate to the inadequacy of documentation, by-laws, who holds liens over company assets, who a business’s customers and suppliers are, labor concerns and financial statements.
From Adam Spiker, Executive Director for the Southern California Coalition
3. Educate yourself on Los Angeles, one of the largest local markets in the world.
According to Spiker (pictured left), Los Angeles is one of the world’s largest local cannabis markets, and the forthcoming regulations in Prop. M will transition the city from an unregulated market to a regulated one by Jan. 1.
Several challenges and expectations await as Los Angeles regulates the industry, Spiker said. No rules are currently in place for manufacturing, lab testing or distribution, and no tax structure has been set up. Spiker anticipates that regulations will be decided gradually, but by Jan. 2, there will be a working supply chain in the city.
4. Know which lessons the industry has already learned.
The industry has already come to accept certain lessons, Spiker noted, such as the fact that sensible policies create a solid foundation for the industry, communities and government. This includes sensible approaches to regulation, taxation, licensing and enforcement, he said, adding that to eliminate the illicit market, the regulated market must meet consumer demand.
From Paul Lessard, President and Chief Scientist at Delta9 Labs
5. Learn about lab testing.
Lessard (pictured left) stressed the importance of understanding lab testing, especially because no standard method exists in California. Oregon is the only state with lab credentials in place where each lab is accredited through on-site audits and “round-robin” testing, Lessard said. In California, different labs may report different results, which he said can be a huge setback for cultivators who put their time and energy into farming a product only to get inaccurate lab results that cause the product to fail.
6. Understand common pesticide issues in California.
There are 66 pesticides in consideration in California, Lessard said, and pesticide limits are significantly below the standards set by Oregon—20 ppm is the proposed limit, whereas Oregon has a 200-ppm limit.
Extraction can increase the concentration of some types of pesticides, he added, and currently a few treatment options to remove pesticides are on the market, although he is hopeful that new pesticide removal technologies may offer solutions.
One Final Word from the Presenters
7. Be careful in decision making.
The last takeaway was echoed by each presenter when they had time to offer final thoughts: Make decisions slowly and carefully.
Rosenblum said much excitement surrounds the industry, but it is very important to take the time to carefully consider each business decision and keep the long-term perspective in mind.
Spiker agreed that many are looking to get into the “green rush” early, but it is imperative to be more prudent and consider each and every choice in your business.
Lessard also advised against impulsive decisions, and said those considering the extract market, in particular, should be careful, studying equipment purchases, asking vendors for demos and trying products before purchase. He said technology is a big investment, so business owners should be careful because it’s possible they’d need to rely on the equipment for a long time.
Images courtesy of RoseRyan