California regulations could snuff out profits for marijuana businesses

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LAS VEGAS – Nearly 20,000 people, eager to profit as cannabis becomes legal in more places around the world, learned last week that tapping one of the biggest markets, California, will prove challenging because of 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, 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 marijuana 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 continue to develop 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 last week, releasing regulations for the nascent commercial market and 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, and 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 growing 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 a sixth of the cannabis grown in California is consumed in the state, leading to questions about interstate 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.

“We fear the feds would like to make an example out of businesses in California,” Graciela Castillo-Krings, a legislative aide to Gov. Jerry Brown, said in a panel discussion. Fears about federal intervention — stoked by U.S. Attorney General Jeff Sessions’ negative remarks about marijuana — 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 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 about a half-dozen 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 to sell marijuana in a state that over-regulates everything.” Castillo-Krings 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 number of potential customers makes the market irresistible to some.

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

Nic Easley said he too is bullish on the California market — simply because of the state’s large population. He said he has more than 200 licenses for a variety of cannabis businesses in the state.

At the same time, Easley, CEO of SC 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 paying taxes. Pete Kadens said success in the ever-expanding marijuana 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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