This has been a landmark year for marijuana-legalization efforts in the United States, with two states– Colorado and Washington–legalizing recreational marijuana sales. Colorado also became “the first place in the world where marijuana is regulated from seed to sale.”1
In addition, 23 states, plus the newest addition of the District of Columbia, now have legalized medical marijuana use. Three states–Florida, Ohio and Pennsylvania2–currently have pending legislation or ballot measures to legalize medical marijuana. The landscape is changing so rapidly, in fact, that it is difficult to maintain a current overview of the market.
Alaska and Oregon will vote in November on legislation that legalizes recreational marijuana usage. Rhode Island was on deck to legalize recreational marijuana this year, but the bills were never called to the House and Senate floors for a vote. Legalization bills and ballot measures are now on the table in 19 states and the District of Columbia.3 D.C. will vote in November on legislation that legalizes possession of small amounts of marijuana, as well as permits home cultivation and the sale of marijuana-related paraphernalia.
Arizona, California, Delaware, Hawaii, Maine, Maryland, Massachusetts, Montana, Nevada, New York and Vermont are thought by some to be next in line to legalize recreational usage, based on the level of public support, decriminalization laws and medical marijuana policies.4
Connecticut, Minnesota, Mississippi, Nebraska, North Carolina and Ohio are on the list of states where it is thought to be “a matter of time” before recreational marijuana usage is legalized.5
Alabama, Indiana, Michigan, Missouri, New Hampshire, New Jersey and Wyoming are on some lists of those states where legalization is thought to be “possible” in the future.5
A “bullish” report from the research arm of the cannabis investor network ArcView Group “predicts 14 additional states will legalize adult use of cannabis and two more states will legalize its medical use in the next five years. Despite this progress, ArcView says regulation and restrictive patient access in New Jersey, Maine, Delaware, and Washington, D.C. will limit the market's potential in those states.”6
Public Attitudes Toward Marijuana Use
Driving this sea change in legislation is public opinion on marijuana use. A majority of Americans now favor legalizing the use of marijuana. A CBS poll places that majority at 51 percent, while a Gallup poll places the number higher–at 58 percent. The Gallup poll reflects a 10-point increase in just two years.
An even more staggering statistic is that 75 percent of Americans believe that nationwide legalization of marijuana is inevitable.7 When it comes to medical marijuana legalization, the numbers are significantly higher. The January 2014 CBS poll found that a whopping 86 percent of Americans support the legalization of medical marijuana.
The CBS poll also showed that marijuana-legalization support is growing across income brackets: “Support for legalizing marijuana use has risen six points among Americans earning under $100,000 a year (50 percent now vs. 44 percent), and 12 points among those earning $100,000 or more (64 percent now vs. 52 percent).”
A recent vote by the U.S. House of Representatives to eliminate funding of DEA medical-marijuana raids in states where marijuana use has been legalized also will go a long way in taking down risk barriers for businesses and investors, opening up the market for more significant growth. And in one of the biggest public statements to date, The New York Times in July called on the country to “repeal prohibition” of marijuana.8
The Political Landscape
Like public opinion, the political environment surrounding marijuana use is shifting rapidly. The passage of medical marijuana laws in almost half the states is one indicator of the rapid support marijuana is gaining in Congress. The federal government’s decision to allow states to pass their own laws regarding marijuana is another. The latter, however, has been controversial, igniting fires between and even within political parties.
The fact that marijuana is still federally classified under the Controlled Substance Act as a Schedule 1 drug (considered highly dangerous and having no medicinal use), along with heroine and LSD, also has created political debate, and some roadblocks for both medical and recreational marijuana markets.
Currently, the majority of Democrats (59 percent), Independents (54 percent) and Moderates (54 percent) support legalizing marijuana use,9 while the majority of Republicans and Conservatives (both at 61 percent) remain opposed to it. The two states that have legalized recreational marijuana have Democratic-controlled legislatures.
As public support for marijuana legalization grows, however, so too will support from political candidates. In July, Rep. Dana Rohrabacher (Calif.) became the first GOP congressman to support legalizing recreational marijuana: “By providing the federal government the right to control personal behavior, it’s totally contradictory to what our country is all about. If they put it on the ballot that they would legalize it, I’d probably support that ballot measure,” Rohrabacher told the Christian Science Monitor.11
As the 2016 Presidential election approaches, marijuana is increasingly becoming a high-profile issue and one that many believe any serious candidates will need to address.
The Wire called weed the “sleeper issue of 2016”12 and reported: “As potential 2016 candidates gather their policy advisors and begin to isolate their views on key issues, they may want to consider one above the rest–weed.”
Likely presidential candidate Hillary Clinton has been one of the most vocal on the issue, which tends to be avoided by the majority of politicians. Clinton has said she has a “wait and see” attitude toward marijuana; that she believes more research is needed on the benefits and implications of medical marijuana; and that "On recreational, states are the laboratories of democracy."13
Bypassing Hillary Clinton as far as addressing the subject head on, however, is presidential hopeful Rand Paul, the Republican senator from Kentucky, who, as noted above, grabbed some hefty marijuana-related issues by the horns, and even pushed to introduce new legislation in support of states’ medical marijuana laws.
The Economic Impact
The (quite staggering) economic impact of legalized marijuana sales is just beginning to be realized, but the full impact hasn’t even begun to be measured.
Current estimates of revenue and tax-revenue generated are based on the revenue and taxation of growers, distributors and sellers. These estimates don’t take into account revenue and taxes from “ancillary” businesses–those that are one step removed from growing, distributing or selling marijuana. For example, lawyers, insurance companies, point-of-sale systems and other retail solutions, marijuana paraphernalia retailers, security businesses, and so on. As more private clubs begin opening across states where recreational use is legal, the impact will be far greater.
The numbers also don’t account for tourism dollars generated, which is turning out to be a significant “side effect” for the states that have legalized recreational marijuana.
So what are the numbers? Forbes reports that, overall, the legalized marijuana market is a “$1.43 billion industry that’s projected to grow to more than $10 billion by 2018,” according to a report by ArcView Market Research–which also projects that “more than 590,000 Americans will have purchased marijuana legally from a retail storefront by the end of this year.”25
Marijuana sales likely will outpace the growth of smartphones, according to ArcView. 25
Medical marijuana sales continue to contribute the lion’s share of marijuana-related revenue, with California being the largest U.S. pot market with $980 million in sales. Arizona is cited as the fastest-growing market, with an anticipated $134 million in sales next year (growth of $112 million in two years).34
The Seller's Market
The market surrounding legalization of marijuana has been likened to the Gold Rush of the mid-1800s, or the dot-com era of the 1990s (and earning the nickname “the dot-bong era”), with marijuana experts, entrepreneurs and even investors racing to cash in on what is proving to be big business.
The opportunity is tremendous, but those who have clamored to open their doors have encountered a number of challenges. Pressed to regulate a brand-new marketplace, states and municipalities are learning as they go, and are not always in agreement, posing even greater challenges. One challenge is that even where marijuana sales are legalized on a state level, some municipalities are banning the establishment of marijuana businesses. Other businesses have faced zoning restrictions, while others have encountered long wait times for application review and approval.
A number of additional considerations exist for those looking to open marijuana businesses. Cost is one. In addition to business startup costs, application and licensing fees can total thousands of dollars.
In Colorado, application fees are $500 for stores, cultivation facilities or manufacturers. Licensing fees range from: $2,200 for an infused product manufacturer; to $5,200 for a store and cultivation facility with a plant count up to 3,600; to $13,200 for a store and cultivation facility with a plant count of up to 10,200. Renewal licenses run about the same as the original licenses.
Washington’s fees, however, are much lower. The state charges a $250 application fee for retailers or wholesalers/processors, plus a $1,000 annual fee (initial and renewal). The same fees apply to manufacturers, for up to 30,000 square feet of dedicated plant canopy.
Some states skew to the almost obscene end of the price scale, such as Illinois, where the non-refundable application fee for cultivators is $25,000. If approved for a license, cultivators must then pay a $200,000 licensing fee, plus an annual renewal fee of $100,000. For dispensaries looking to open in Illinois, the costs also are steep: There is a $5,000 application fee, plus $30,000 licensing fee and a $25,000 annual renewal fee.
Another cost is insurance. Because marijuana still is considered an illegal substance by the federal government, insurance companies that normally would insure retail businesses have been reticent to provide insurance to marijuana businesses. If they do provide insurance, marijuana dispensaries typically are faced with rates two to 2.5 times higher than those for standard businesses.36
For those companies that do provide insurance to marijuana retailers, it is considered big business. Washington State, for example, has mandated that marijuana dispensaries carry liability insurance, making insurance a guaranteed business.37 Some insurers are offering marijuana retailers a unique type of insurance–called raid insurance–that would pay the retailers’ legal costs and replace their product in the event of a raid, if the business is found to be innocent of any charges. (The coverage doesn’t apply to federal raids.)37
Retailers and growers must also invest in alarm and surveillance systems, with specific requirements for the placement of cameras (including at the cash register, entrances and exits) and storage of the surveillance device, as well as ID badges for all employees.
In both Washington and Colorado, marijuana licensees must track marijuana “from seed to sale” using a system specified by the respective government agencies, and the licensee is responsible for all costs associated with tracking. The tracking policies were implemented to ensure that growers accurately report their harvests, and retailers their “stash,” and do not leak marijuana into the black market.
While the big-money-generating marijuana businesses may be said to be laughing all the way to bank, as the saying goes, on the more literal side, they actually couldn’t do so. Banks have been reticent to provide services to marijuana businesses, considering marijuana is still considered illegal by the federal government. Banks that conducted business with legal marijuana businesses would be in violation of money-laundering rules.
The good news, however, is that the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a guidance report specifying services that financial institutions could provide to marijuana-related businesses. “The Treasury’s guidance does not completely let banks off the hook, as the drug remains prohibited by federal law. But, if the banks monitor their legal marijuana clients carefully, they will be in compliance with the guidelines,” explained Live Trading News.
But the banking industry wasn’t the only one facing legal challenges in working with marijuana-related businesses. “Professionals with ties to the marijuana field–doctors, lawyers, accountants among them–have been threatened with license revocation despite operating within the bounds of their own state laws. Federal prosecutors continue to go after growers and dispensaries in the 23 states where medical marijuana is legal,” Live Trading News reported. “’You still have to have a certain tolerance for risk if you’re getting involved in the industry,’ said Taylor West, deputy director of the non-profit National Cannabis Industry Association. ‘Progress has been made, but nothing has been done to change the fundamental fact that this is illegal.’ Last year, the U.S. Department of Justice announced it would defer to state marijuana laws under some circumstances. That leaves a lot of room for interpretation, which, in turn, has made insurance more important for the business owners.”
Editor's Note: The above is excerpted (and slightly adapted) from the special report, "Entering the Marijuana Market: Your Essential Guide," part of Cannabis Business Times' Smart BusinessTM Series. You can order your copy of the full report–which contains information about medical and recreational marijuana laws, business risks and opportunities, as well as tips for "potrepreneurs"–here ($99).
Sources
1. CNN
2. Medical Marijuana Pros and Cons.ProCon.org
3. Mother Jones
5. Mother Jones
6. Fast Company
9. CBS News
