The cannabis industry has substantially grown in response to significant developments in legalization. As a result, multi-state operators (“MSOs”) and budding entrepreneurs nationwide are entering prospective state cannabis markets. Given the legal intricacies surrounding the cannabis industry, there is much to consider before jumping into starting a cannabis-related business.
Working with a trusted cannabis law firm like Ritter Spencer Cheng is one of the best ways to prepare for cannabis market complexities. Having experienced cannabis counsel is invaluable in such a highly regulated, ever-changing industry. Below we break down six critical considerations for expanding into new cannabis markets.
State Legislature
When starting a cannabis-related business, the first thing to consider is cannabis legislation at the state level. Because neither recreational nor medical use of cannabis is permitted at the federal level, any prospective cannabis business venture in regulated markets is wholly dependent on location
Using Texas as an example, cannabis possession remains illegal under Texas law. However, there is an exception for valid medicinal use for qualified patients participating in the Texas Compassionate Use Program.
State Regulators
Also dependent on the state — the agency responsible for regulation of the legal enterprise within the state is another vital factor to consider before entering the cannabis market. Certain U.S. states have commissions solely dedicated to the state’s cannabis-related initiatives. Meanwhile, other states will only have individual directors for the matter. Here in Texas, we remain the only state to place oversight of the medicinal cannabis program entirely under the purview of law enforcement, namely the Texas Department of Public Safety. The state of Texas has incredibly high entry costs compared to other states and as a vertically integrated state, operational regulatory requirements are fairly high
By way of contrast, Michigan has a centralized Cannabis Regulatory Agency that oversees initiatives regarding medical marijuana facilities licensing, adult-use cannabis, hemp processing, social equity programs, and overall consumer access to cannabis and its derived products
Interest Rates
All budding markets must raise capital to foster financial growth regardless of the industry. However, cannabis industries face unique challenges compared to other traditional business sectors. Due to cannabis status as a Schedule I substance federally, access to banking is always a challenge for the cannabis industry. Additionally, US cannabis companies cannot be listed on the US stock exchanges and trading cannabis securities in the United States is technically illegal. Lastly, cannabis remains a risk inherent investment with no guarantee of ROI. As a result, cannabis companies have a more challenging time raising capital and experience higher operational costs. Top this with the complexities and difficulties of operating within IRS 280(E) and you may be surprised to learn that most cannabis operations are either in the red or barely surviving.
Local Licensing
Obtaining a license is an essential step in opening a cannabis-related business no matter what jurisdiction you are located in.. However, the licensing process varies by state and business category. And in states with limited local licenses, competition among prospective companies can be fierce. In Texas, despite the passing of the Texas Compassionate Use Act in 2015, there are only three licensed dispensing organizations permitted to cultivate, process, and distribute low-THC cannabis to prescribed patients. This is partly due to the state’s high entry costs and vertical integration requirement, but also due to the fact that the licensing period has only opened once. It is currently open until April 28, 2023. . Before taking a financial risk in new cannabis markets, knowing various requirements and fees for licensure and registration is essential
Legal Timelines
Before entering a new cannabis market, following local legal timelines on marijuana is essential. For much of the general public, the line between passing a bill and the applicable law going into effect is blurry. Monitoring bill timelines carefully is vital, as this can make or break a business. By working with a trusted legal counsel like Ritter Spencer Cheng, prospective cannabis entrepreneurs can easily follow along with legal developments in their state and stay apprised of upcoming changes
Brand Reputation
Entering a new cannabis market does not come without its fair share of risks. While a company’s image, brand name, and overall reputation may take years to establish, this can easily crumble with just one misstep in the cannabis industry. Due to marijuana’s precarious legal status and intensive regulatory scrutiny, it can be easy to make a mistake in the cannabis sector. Incidents like fraud, product recalls, incorrect dosing or labeling, trademark infringement, unproven health claims, and more are all common in this complex industry. For a business owner, incidents like these can be hard to recover from and, in severe instances, can tarnish a brand’s reputation for the long haul. Qualified cannabis counsel can assist you with certain risk management tactics and day to day regulatory compliance issues.
Prospective business owners in the cannabis community should be aware of the significant complexities in operating within the cannabis industry. By trusting experienced cannabis attorneys like Chelse Spencer, clients gain the counsel necessary to advance in the hemp, CBD, and cannabis industries. Contact Ritter Spencer Cheng or give us a call at 214.295.5070 for more information.
