David Standa, Esq.
While cannabis continues its slow, zombie-like march towards mainstream acceptance, there are some spooky factors out there that deserve a closer look on this All Hallows’ Eve. While they may not be as frightening as ghosts and goblins, here are the spookiest trends impacting the cannabis industry right now.
Lack of Access to Capital
It is hard to fathom how quickly the cannabis industry landscape has changed. Eighteen months ago, investors were falling over themselves to get in on the Green Rush. Capital was cheap and plentiful, and RTOs were all the rage. Fast forward to today, and investment capital has all but dried up and companies that are publicly traded have watched their stock price take a beating. Selling equity, which used to be easy, has become nearly impossible and the price of taking on debt has become almost cost prohibitive. This is certainly a scary trend, but one that could be slowed if not reversed outright nearly overnight. If the Senate can figure out a way to pass the SAFE Banking Act and pave a way to traditional financing for cannabis companies, then every cannabis establishment, from large-scale MSOs to newly licensed startups will immediately have new avenues to cash. That cash may still be more expensive than it was 18 months ago due to the Feds insistence on continuing to raise rates, but it will be cheaper and easier to access than the few current options that exist. However, relying on SAFE Banking may be more of a trick than a treat. The Act passed the House four times last congress and every time it flamed out in the Senate. The industry as a whole remains optimistic that it will pass in 2023, but that optimism has been around since 2020 with no results to show for it.
Lawsuits, Lawsuits, Lawsuits
As the cannabis industry has exploded with more states coming online and more companies operating in multiple states, it has seen a rise in litigation spanning all sectors of the industry. Even discounting the litigation stemming from state licensing processes, which is always expected, cannabis litigation has exploded over the last 24 months. Litigation related to employment disputes, contract disputes, and IP and trademark disputes, just to identify a few categories, are all on the rise. And it should be noted that the increase in litigation is not between cannabis companies suing other cannabis companies. Often it is companies outside the cannabis industry suing to prevent a cannabis company from doing something. Indeed, just last week the organizers of the Coachella music festival brought a lawsuit against a cannabis company over the use of the name “Coachillin.” That is the kind of lawsuit that was just not seen two years ago. The industry has exploded onto the mainstage, and it now has the attention of other established industries that are going to try to protect their turf through litigation. The same goes for employment disputes. As the industry has expanded, unions have joined the game, and with that a whole host of legal issues regarding employee protection now must be considered by cannabis companies. So called “donning and doffing” lawsuits have been filed in multiple jurisdictions alleging that employees are not being properly compensated for the time it takes to put on and take off PPE at cultivation centers. The rise in litigation is scarier than encountering a werewolf under a full moon because rarely do startup companies, which most cannabis companies still are, have sufficient funds set aside to pay for prolonged litigation. Obviously, the best way to protect your company from unexpected litigation is to invest in solid regulatory compliance legal assistance on the front end, but most startups try to cut corners wherever they can, and unfortunately legal spend is one of the first things to go. This article should serve as a warning about the perils of such a decision.
President Biden’s Pardon Announcement and Federal Action on Cannabis
It is common at a cannabis industry conference to hear someone proclaim that the industry would be in such a better position if the federal government would just “legalize” cannabis. Legalization sounds great in the abstract, but it is not a simple black and white issue; there are layers and layers of grey area. If congress and President Biden were to pass legislation legalizing cannabis cultivation, possession, and consumption, then that legislation would preempt all the existing state cannabis laws, and the ripple effects would be profound. States would lose the ability to restrict the importation or exportation of cannabis across their borders. Expensive, energy sucking, indoor grow facilities currently operating in states with unideal cannabis climates will become obsolete almost overnight. Large, outdoor, grows that can be setup on cheap swaths of land in states with ideal climates will become the norm. Cannabis grown on that cheap land will be shipped all over the country, and states that are currently enjoying significant tax revenue from indoor cultivation facilities will watch that tax revenue dry up. So, full legalization may sound great in theory, the significant paradigm shift it would usher in is likely too large of a shock to the system to garner full support from the existing industry leaders. Therefore, when you hear people advocate for legalization, what they are likely advocating for is decriminalization.
Decriminalization, or removing cannabis from Schedule I of the Controlled Substances Act, would help remove the stigma around cannabis, it would eliminate unnecessary enforcement and expenditures in the criminal justice system, it would allow well-funded research into the plants additional functions and uses, and it would free up access to capital to an industry that desperately needs it. In other words, decriminalization accomplishes what the SAFE Banking Act is seeking to do, but so, so much more because it also addresses some of the social issues that have resulted from the federal governments inequitable War on Drugs. President Biden grabbed headlines earlier this month when he
announced a “pardon of all prior Federal offenses of simple possession of marijuana,” “urged” state governors to take similar actions at the state level, and asked the Secretary of Health and Human Services and the Attorney General to initiate the process to review whether cannabis should remain a Schedule I drug. Biden enjoyed a victory lap in the 24-hour news cycle, but a deeper look at his announcement reveals that it didn’t really accomplish much. The pardon results in approximately 6,500 convictions being overturned, but that was 6,500 convictions entered over a nearly 30-year span. In other words, the pardon overturned less than 220 convictions per year. A drop in the bucket considering how much damage the War on Drugs has done to disproportionately impacted communities over that same time frame. Further, “urging” governors to take action, and asking other political offices to start taking action is political fodder that provides no concrete results.
As you don your costumes and head out for trick or treating tonight, the cannabis industry is at a bit of a crossroads, but there should be a clearer picture of where things stand by the time we reach Halloween 2023.
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