Michigan May Become A Haven For Cannabis Entrepreneurs If It Learns From California’s Mistakes

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Unless something drastic happens, it looks like adult-use recreational marijuana will become legal in Michigan on December 6. Adults over 21 will be able to legally possess and smoke marijuana on private property. But recreational marijuana won’t be going on sale until the Michigan Department of Licensing and Regulatory Affairs (DLRA) decides on the rules and issues licenses, which is going to take until early 2020.

When it rolls out, Michigan will be the first state in the Midwest to legalize adult recreational use marijuana. The state has had a medical marijuana program in place since voters passed the Michigan Medical Marihuana Act in 2008, which effectively legalized limited amounts of medical cannabis for patients and their primary caregivers.

But recreational marijuana introduces a level of business opportunities, innovation, and investment that far exceeds what a small medical market demands, and that has excited cannabis advocates in the region. The 2018 midterm election saw many pro-marijuana legislators and attorneys generalcome into power in Michigan, which bodes well for the 2020 rollout.

Still, Michigan just may be the tipping point for adult use programs with an estimated market of $1.4 billion-$1.7 billion in annual sales. That level of sales will put it behind only California, which is expected to hit over $2.5 billion in sales in its first year.

But California’s success is not what it could be. A combination of factors at the local, state, and federal levels have dampened the enthusiasm surrounding California’s enormous potential. As Michigan businesses gear up for 2020, it is already apparent that Michigan will provide a leaner, more business-friendly regulatory landscape compared to California.

Multi-state cultivator and manufacturer Grassroots Cannabis has been working in neighboring states like Illinois and Ohio, and sees a successful rollout in Michigan as an important step towards legalization throughout the region—and, ultimately, the country. “We’ve found our best success entering states at the ground floor with a specific focus on limited license and/or highly competitive markets, and Michigan fits both of those qualifications,”Grassroots Cannabis’s CEO Mitch Kahn told me when I sat with his team at the world’s largest cannabis business conference, MJBizCon, two weeks ago in Las Vegas, Nevada.

MJBizCon Grassroots Cannabis (from left to right) Lisa Hurwitz, Matt Darin and Mahja SulemanjeeMICHAEL HOWARD (@TOPSHELFKIND)

This growth is naturally expected to create a surge in plant ancillary products, as well. “Agriculture is a huge part of the Midwest’s economy, and right now, cannabis offers the most profitable option for farmers of all sizes,” Marco Hegyi, CEO of GrowLife, Inc. (OTCQB: PHOT) told me in a written interview. His company provides world-class hydroponic equipment, lighting, nutrients, media, and other cultivation supplies to commercial and urban operations.

GrowLife focuses on emerging markets as they come online, and Michigan is a unique opportunity for as the law permits anyone to cultivate up to 12 plants in their home. That means a Hegyi and his team could be looking at a whole lot of demand out of nowhere by people who will be looking for that same type of cannabis growing equipment just in time for Christmas jolly.

And to top things off, Michigan just allowed for home delivery. So the stay-at-home consumer can order both hydroponics and Indica-Sativa hybrid oil at the same time–pair that with the soundtrack to The Graduate, and you’ve got an ideal combination for enjoyable afternoon of garage grow assembly.

Indeed, Michigan looks promising for the stake brandishing cannabis capitalist. However, until the regulations are set, and businesses are able to get licensed, there remains a lot of work to do to ensure the best possible cannabis market in Michigan. Let’s take a look at some of the reasons for California’s bumpy rollout this year and the lessons Michigan lawmakers and entrepreneurs can learn from it.

Why California has yet to become a cannabis utopia

  1. An Overly Complex Regulatory Model

If you want to break into the cannabis industry in California, there are a lot of hurdles to jump through. First of all, California has a dual-licensing system, meaning cannabis businesses need to get licensed both by the state and by the city or county in which they’re doing business. While recreational marijuana is legal throughout the state, thanks to the dual-licensing model, an estimated 65% of cities and counties don’t permit cannabis sales.

Then, there are three different agencies at the state level responsible for managing the cannabis industry. Stores, testing labs, and distributors are governed by the Bureau of Cannabis Control. Cultivators are regulated by the Department of Food and Agriculture, which issues a whopping 18 different types of licenses for cultivators. And manufacturers work with the Department of Public Health’s Manufactured Cannabis Safety Branch. The fragmentation of the regulatory body has created a complicated landscape for many businesses to navigate. As a result, the OC Register reports that 6,000 cannabis businesses have received temporary permits. This represents only a small fraction of the cannabis businesses in the state. The story is the same for cultivators: of the 50,000 growers in the state, only 6% had been licensed by April 2018.

The result is an undersaturated legal market for consumers. Compared to Oregon, another adult recreational use state, California has 15 times feweradult use stores per 100,000 residents. The future doesn’t look any easier for companies in California. Six months after recreational marijuana went on sale, new safety laws took effect requiring further testing for chemicals, pesticides, and foreign materials.

Proposition 1, the ballot measure that passed in Michigan in 2018, was designed with the intent of avoiding the hyper-regulated mess of the California model. Prop 1 expressly prohibited the Michigan DLRA, which will oversee the commercial production and distribution of marijuana, from establishing many of the rules that hamper California. The DLRA cannot limit the number of licenses, prohibit medical and recreational businesses from operating together, or create rules that would “be deemed unreasonably impracticable.”

Cannabis advocates in the Midwest are hopeful that Michigan can create a regulatory landscape that encourages a vibrant legal market while keeping customers safe. Offering less friction and a single, agile regulary unit will play a big roll in providing both. “Michigan’s model of only having one regulatory agency versus multiple should be more business-friendly [than California’s model],” Kahn told me.

  1. Not Ending the Black Market

California legalized medical marijuana in 1996, and for patients acquiring a license is relatively simple in many areas. Nevertheless, the state had—and continues to have—a huge black market. The combination of high taxes, overly complex regulations, and lack of capital created a marketplace that disincentivizes former black-market operations from going legal. As the New York Times reported earlier this year, only 3% of marijuana farmers in the state have obtained licenses, so the black and grey markets are still dominant.

Businesses aren’t the only ones sticking with the black market. The high cost of legal marijuana discourages buyers from patronizing legal establishments. In the same New York Times report, they estimated that marijuana purchased from a retail store would cost 77% more than the black-market product. That’s a price increase that’s tough to swallow, and it’s keeping customers out of retail shops. Despite legalization, some facilities are reporting a decrease in sales, in some places up to 20%.

California’s over-regulated approach to marijuana has, for the most part, had the opposite effect that it intended. Instead of creating a marketplace where marijuana users have consistent access to safe products, it has kept growers, distributors, sellers, and buyers out of the legal market.

While Michigan’s black market isn’t as sophisticated or as large as California’s, the regulators tasked with the rollout in 2020 need to incentivize today’s black market to join the legal market. If today’s black market businesses don’t join Michigan’s legal market, the promised tax revenues won’t materialize and critics will point to the persistence of the black market as an intolerable fault.

  1. Killing Opportunities for Small Businesses

Of the businesses that have successfully joined the legal market in California in 2018, most are not small businesses. In fact, California’s market seems almost expressly designed to make it difficult for small businesses to get started.

California’s licensing system is, according to the OC Register, built around loopholes that can be exploited by larger corporations who have the cash on hand to pay for the many start-up costs and compliance fees. The state places a limit on “medium” sized growers—they can have one license. But there is no limit on “small” growers, which has led to “a half-dozen companies [that] have scored hundreds of ‘small’ cannabis grower licenses plus their token ‘medium’ farm permit.” So, rather than encouraging small businesses by limiting the licenses for large growers, the large corporations are simply dividing themselves up to circumvent the rules.

The high cost of starting a cannabis business is compounded by the fact that the industry operates almost exclusively on cash. Since marijuana is still considered a Schedule 1 drug by the federal government, federally insured banks won’t extend lines of credit to entrepreneurs. That severely limits the pool of people able to start a business in the industry. Beyond the federal government rescheduling the drug, the only other solution to the credit crunch, according to American Banker, is create a state-run, state-insured Bank of California that would operate outside of the Federal Government.

Not only can cannabis businesses not get lines of credit, but they also get jipped when it comes time to pay taxes. Marijuana’s Schedule 1 status means the tax breaks that other businesses get don’t apply. As Vox notes, with the deductions that keep most businesses tax rates at around 30% unavailable to them, cannabis businesses pay an effective tax rate as high as 90%.

While business can deduct 100% of a multi-million dollar private aircraft under the Republican party’s tax reform laws, few small cannabis businesses can survive a heavy tax burden with zero deductions and credits for even a Petri dish. Small cannabis businesses don’t have the money, legal resources, or expertise to enter into the marketplace. As Michigan lawmakers crafts their regulations, they would be wise to learn from the loopholes and unfair practices that have kept many small businesses from even getting started.

Michigan has legal weed, but grassroots pressure is still needed

Prop 1 passed in Michigan thanks to grassroots pressure and industry support. But as any ballot proposition evolves into regulations, the devil’s in the details. The groups that wrote Proposition 1, led by the Coalition to Regulate Marijuana Like Alcohol, intentionally wrote it to promote small businesses and to prevent an overzealous legislative body from hamstringing the people’s will with limits on licenses.

Michigan native and co-founder and CEO of CannAmerica Brands, Dan Anglin, is excited at the opportunities to bring cannabis to his home state. “The way the ballot measure was structured allows for a variety of product types and allows for thriving marketplace and competition.,” he told me in an interview at MJBizCon.

INSTAGRAM: @CANNAMERICACO

After all, the state of Michigan has 10 million people, or 4.4 million more than Colorado at 5.6 million. And Colorado is a state generating $1.5 billion in cannabis sales in 2017. Anglin uses a factor of 2.5% to conservatively estimate the number of recreational cannabis users in a given market, making a potential customer base of a quarter of a million monthly buyers.

But those estimates can be deceivingly low. Like Colorado, Michigan is also a tourist destination. Boats sail across the lake all summer long as visitors enjoy the lush greenery and undeniably bucolic Midwest setting.

“It’s hard to determine how much of recreational cannabis sales are tourists and how much can be attributed to residents,” Anglin explained. “But in Colorado we’re seeing more like 7% of the population engaged in recreational cannabis sales. Far more than the 2.5% factor we’re conservatively using.”

Nevertheless, until 2020, vigilant advocacy is still needed to create the best possible cannabis industry in Michigan. Before the vote during the midterms, medical marijuana dispensaries in the state began running out of weed because they couldn’t get enough from licensed growers. Without enough production in the state, they may have to put business on hold for months.

And like California, Michigan has a dual-licensing system, meaning local communities can effectively ban cannabis businesses from the area. Cannabis consumer advocacy will be needed to ensure Michiganders have equal access to cannabis by petitioning local governments, and, when necessary, voting the politicians out of office who are blocking businesses from taking root.

With the right regulation and licensing structure, this scenario—and the many issues plaguing California—can be avoided when recreational marijuana goes on sale in 2020. Michigan’s success—or failure—will be a bellwether for the rest of the Midwest.

The 66% of Americans who support legal recreational marijuana will be watching.

 

 

https://www.forbes.com/sites/andrebourque/2018/11/29/michigan-may-become-a-haven-for-cannabis-entrepreneurs-if-it-learns-from-californias-mistakes/

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